As per Wikipedia, “A budget is a quantitative expression of a financial plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units, organizations, activities or events in measurable terms. A budget is the sum of money allocated for a particular purpose and the summary of intended expenditures along with proposals for how to meet them.”
In simpler terms, the company’s annual budget is a derivative of its vision and long-term business plans. The annual budget is also an aggregation of budgets of all the functions of the company.
However, as a matter-of-fact, core business functions, such as manufacturing, procurement, sales, supply chain, marketing, etc., always have grabbed the limelight when it comes to any discussion on budgeting. This is because of the prominence of their direct impact on the top-line and bottom-line. Whereas some functions including HR have not received due attention in terms of budgeting as implications of their actions on top or bottom-line are not that easily quantifiable. IT and ITeS industries are an exception to this as for them HR is a core function.
Need for an HR budget
Besides, it is a common perception of the top management that the HR Manager does not have flair for numbers and finds it difficult to grapple with financial processes and terms. Understanding numbers and accurate budgeting is the first step towards correcting this perception.
In addition, budgeting is an opportunity to identify and recognize every cost that the HR function incurs directly or indirectly and for which the HR Manager is accountable.
Operational expenditure/ Numbers budgeting
In part 1 of this two-part blog, you’ll cover all the elements that constitute HR budget at a broader level:
- Workforce numbers (total number of employees) for the new financial year across grades, functions, locations and business units - This includes replacement numbers (based on projected turnover/ attrition numbers), new recruitment (for accelerated growth and/or expansion), promotions and internal transfers (by virtue of re-sizing of functions).
- Source-wise (campus, portal, consultant, referral scheme, walk-in, etc.) recruitment and selection cost – This includes advertising cost, consultant cost, job portal subscription, referral cost, medical check-up cost (if conducted for new recruits), reimbursement (travel, stay, food, etc.) to candidates, reference-check cost (if an agency is hired for this), travel cost for campus visits and walk-in, venue cost for walk-in, etc.
- Compensation (CTC) and non-statutory benefits – This includes incremental compensation for existing employees, total compensation for new employees, food subsidy, the cost of pickup and drop facility, superannuation benefit and life insurance policy cost for senior management employees, etc. In addition, overtime (especially, in the manufacturing sector for workers and in administrative services for drivers and peons) and sales/ production incentives could also form part of this element.
- Statutory Benefits / Cost – This includes incremental and new liabilities towards Provident Fund, Employee State Insurance, Gratuity, Accident Insurance, Maternity Benefits, Bonus, etc. Mediclaim cost for non-ESI employees also requires estimation and budgeting. The cost of medical check-up as per the Factories Act would come under this element. Overall, statutory benefits emanate from the workforce and CTC numbers and applicable statutes.
- Training and development – This includes a number of internal and external programs (emanating from performance appraisal system and business requirements). For external programs, the cost would include nomination fees and logistics (employee stay and travel). Some companies also debit the per-day CTC of an employee towards this cost. For internal programs, the cost would include (external) faculty cost, logistics (travel for faculty and participants, conveyance, lodging and boarding, material, venue, audio-visuals, etc.). For an internal faculty for internal programs, CTC per day could become the cost towards professional fees.
- Events – This includes a schedule of employee engagement activities, events like annual day celebration, founder’s day celebration, etc., and the number of participants for each event. Major cost components here are venue, food, transport, gifts/prizes, etc.
- Rewards – This includes the cost towards rewards (monthly, half-yearly, annually other than Bonus or Sales/ Production incentives) depending on the company’s policy or practice. The purpose of such rewards is to acknowledge the specific/critical contribution of employees. Such rewards can be event-based or linked to pre-defined performance criteria. ‘Employee of the Month’ is a classic case of such a reward.
- HR Surveys and Interventions – This includes consultant’s cost for conducting a survey or subscription cost for participating in a survey managed by a third party for specific purposes. Examples include employee satisfaction survey, employee engagement survey, Great Place to Work Survey, etc. Another element could be the cost of a consultant for assisting the HR Manager in undertaking OD interventions. Such interventions may be regarding productivity enhancement, performance management system, culture building, workforce rationalization, hierarchy reorganization, etc.
- Miscellaneous – This includes lawyer costs (for carry-forward and anticipated cases) and likely financial liabilities (in the event of company losing the case), magazine subscription, travel cost of HR team members (for recruitment, site meetings, visits to lawyers and consultants, employee meetings), get-together of HR team members, HRIS or HRMS software maintenance, etc.
Initial capital would be needed for the the following items:
- Attendance hardware systems (replacement as well as additional)
- Computers/laptops/printers for HR team members (replacement as well as additional)
- Mobile handsets for HR team members as per company’s policy
- HRIS or HRMS software (First-time license purchase)
It is imperative to understand that each additional employee implies specific operational and capital cost. Operational cost includes salary, incentives, subsidy, uniform, etc, Capital cost includes computers/laptops, sitting arrangement (where applicable), a new vehicle (if the company has a policy for senior management), various reimbursements, etc. Most of these are a part of their respective function’s budget (specifically IT and Administration). The job of the HR Manager is to give an accurate estimate of workforce numbers to managers of these functions.
It is crucial for the HR Manager to grasp terms like YTD (Year Till Date), Q-o-Q (Quarter-on-Quarter), Y-o-Y (Year-on-Year), etc. These are the terms used by the Finance Manager and the top management with reference to progress on budgeted estimates. Further, the HR Manager ought to have a grip on individual income tax rules to help employees with their IT deductions and planning, if and when required.
To summarize, budgeting is a critical talent and skill for any HR Manager. Accurate budgeting sets the foundation for effective monitoring of each cost element. This, in turn, enables the HR Manager to participate effectively and contribute meaningfully to management discussions at various levels. The quality of this participation and decision-making thereof greatly influences the image of HR function in the eyes of its key stakeholders.
The actual process of budgeting is a great learning tool for you, as an HR manager. It enables you to acquire an understanding of the business. This, in turn, helps you to visualize the implicit and explicit role of the HR function in helping your company achieve its goals.
In other words, the process of budgeting goes beyond mere numbers. It is actually about demonstrating your capability of being a business partner.
To have an overview of the actual budgeting process, read Part 2 of this two-part series.