How To Prepare the HR Department Annual Budget?

How To Prepare the HR Department Annual Budget?

Allocating budgets for a department is not as simple as it sounds. You need to go through a lot of decisions to make a certain budget.

Annual budgeting for a department in the organization means to allocate monetary funds necessary for a certain department to carry on the processes for a department in alignment with company goals and objectives for a year.

HR Department Annual Budget

HR departmental annual budget mostly deals with allocating budgets for HR department processes including recruitment expenditure, training and development costs and employee salaries and benefits. 

There are two common budgeting methods for HR department – 

• Zero-based budgeting: The budgeting starts from zero and establishes by making step by step decisions by justifying the need for every point of budgeting.
• Incremental budgeting: The budgeting revises the old budget of the department and makes necessary changes like addition or subtraction in accordance with the necessary needs of the upcoming year.

Now, as an expert in HR, I am going to describe you the general steps to create an HR department annual budget:

Preparing HR Department Annual Budget Step By Step

1. Review Previous Year’s Budget

While you are going to prepare the budget for the HR department, the starting point should be reviewing the previous year’s annual budget if there is any. This is a fundamental starting point for your budget preparation. If there is none, then you can start from the next step.

2. Collect Data

When you have revised the previous year’s data then you can start collecting data, or you can collect data according to the components you need for your Human Resources budget allocation. 

While you are processing budget you must keep in mind the following points:

• Number of employees projected in each department necessary
• The salary, benefits and provident fund of the employees
• Possible turnover rates
• Any kind of new policy or programs those may affect the expenses

3. Establish Goals

You should keep in mind that the budget must be maintained in accordance with company goals, objectives, vision and mission. Besides, you can run a short analysis of SWOT i.e. Strengths, Weaknesses, Opportunities & Threats before drafting the budget. Because two points are vitally important here – 

• The allocated budget should be realistic and in accordance with company’s expense policy
• The budget must be in accordance with the expectations of other departments like marketing and finance

4. Draft the budget

Now it is time to understand where you may need which kinds of budgets and input them in your draft. You must use any kind of spreadsheet software like Microsoft Excel or Google Spreadsheet to create the budget according to the components part by part. After this, you should make a summary which should be clearly understandable by the management or the finance department. For components of the budget, please see the components part below.

5. Review the budget

Next thing is to get a review on the budget from the Finance department and the Management because usually they are the ones in the role of approving the budget. If they need any kind of addition or subtraction from your allocated budget, you need to take the input and put it accordingly.

6. Audit regularly

It is your duty to audit the budget and monitor accordingly, even implementation of new strategies from time to time to make the best out of it. Budget success lies in the strategy. So, you must not ignore the budget afterwards.

Tips to create a good budget

• Budget is a financial strategy for your department, so you should keep it aligned with organizational objectives next year.
• Take prior advice and perceptions from the Finance and Management for specific points so that a support for approving the budget is already created.
• You can be flexible and put possible higher expenditure at the points where there are possibilities of budget cutting. This is called sandbagging.
• Number of recruitment for each department, compensation, training and development are the most vital points for focus in the budget. You should handle them carefully.
• Most of the annual budgets fail due to lack of monitoring and auditing regularly. You should keep an eye on the expenses and revise regularly for HRD success.

Components of HR Department Annual Budget

Following is a list of necessary components you need to include in budget, but according to your organizational needs:

1. Selection and Placement Process

1. Recruitment Circulars and Publications (Internal & External)
2. Agency Expenses
3. Background Checks
4. Interview Process including Skill Testing and Drug Testing
5. IT based cost – Web Development and Applicant Management
6. Possible Gifts and Induction Process

      2.    Training and Development

1. External Training for Personnel Including Traveling and Registration Costs
2. Certification Costs
3. Internal Programs Including Trainer Fees and Events Costs
4. Supplies or Gifts for Participants

      3.    Compensation and Employee Benefits

1. Salaries
2. Payroll expenses
3. Overtime
4. Insurance
5. Gratuity
6. Bonuses
7. Incentives
8. Possible increment at appraisal
9. Any other possible monetary benefits from the employer

      4.   Employee and Labor Relationship Development Cost

1. Awards Program
2. Performance Management Software
3. Diversity Management

      5.   Health & Safety

1. Primary Healthcare Facilities
2. Safety Measurement

      6.   Other Expenses

1. Possible Consultation Fees
2. CSR Related Expenses
3. Employee Help 
4. HR Database Maintenance

Conclusion

If you are planning to create a good budget and a realistic one, then you should find out the previous history of budgeting and implementation to achieve success with a new one. Besides, at the primary point, taking feedback on previous expenditures from the management also helps very well.

Read our Complete guide on How to Monitor & Conduct Annual Performance Evaluation?