HR BUDGETS: concepts and approach.

What do you understands by the word “budget”?!

It is a document or statement of expression of intent for income and expenditure for a set period. It is a statement of Financial Plan for a stated period.

HR Budget is the document expressing the intention by HR to meet financial obligations relative to set financial expectations of the organization.

Steps in HR Budgeting

1. Prior year or current period review 

2. Manpower plan

3. Training plan

4. HR budget draft 

5. Workforce budget draft

6. Final budget draft

Step 1: prior year budget review 

This is good because it explains the essence of spending for prior period. It comes with explanations of budget variances. 

The review must be done between budgeted and actual cost or income. Variances should be explained. For instance, foreign training spending for FY2017 may exceed budgets due to changes in exchange rate.

Also, budgets should be clearly stated in the light of the values it delivers.

Step 2: carryout manpower plan

This is required to ascertain the current employee levels and also to know the number of employees required for next prior

To carryout manpower plan, it is better to know the number of employees required for each role and ascertain expansions. You can determine addition to staff strength in 2 ways 

1. Trend analysis 

2. Actual employee requests by Heads of Department

The second is more reliable and better. Trend analysis indicates that employee growth rate may be applied as components of predictive analytics. For instance if average employee growth in the past 5 years has been 5%, this can be applied to know the additional number of employees that will be required.

Also, in determining additional staff you can decide how much will be paid to each employee. This is a budget for employees.

Also, there’s what I call promotion potential. This is an indication that some employees may be promoted and the payment differential should be considered in the budget.

To arrive at good cost estimates for salaries, the budget for additional employees and promotion differential should be considered.

Step 3: determine training cost 

From your training plan, set up training costs. This is drawn from training plan for each employees. The plan for each employees should be drawn and also for in-coming employees. 

The budget should include the training costs for current employees and for proposed additional employees.

There are two types of budget that HR must maintain.

Type 1: Workforce budget

Type 2: HR departments budget

Workforce budget covers compensations, training costs, regulatory costs (especially for expatriates), and other costs that generally relate to employees.

HR department budget is the budget that relates to activities and operations of HR department. Like cost of printing, stationeries, travel and accommodations etc. these are costs that directly relate to operations of HR department only

There are 3 categories of budgets 

1. Running budget 

2. Zerobased budget 

3. Activity based budgets

Running budgets are push forward of spending from prior period. For instance, if budget for last year is unspent, the budget this year can make a rollover from next year

Zero based budget ensures that spendings are justified without consideration for rollover from previous period.

Activity based budget ensures that each expenditure is linked to an activity in a business unit.

Let’s move to budgets items like ITF, Pensions, HMO, NSITF and NHF

Take these as components of the salaries computed from manpower plan. In this case, apply the base deductions to get appropriate values

In the budget template, these should be considered.

Under the budget, there’s what we call miscellaneous expenses. For instance spendings on:

1. Gifts for employees on weddings and childbirth 
2. Bereavement support
3. Entertainment.

We assume that this should be 5% of total employee budgets.

When all the budgets are summed up, a total is arrived at and a contingency spending of 10% can be added to the grand total as extra budgetary provisions.

Do you need a budget template, please drop your email as a comment

Thank you

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