Vol. 50, No. 1
Examine budget reports carefully to fine-tune expenses and prepare for next year.
If your company is just beginning its new fiscal year, as many companies are, you may assume that it's far too early to start thinking about budgeting for next year. But many financial experts say you should start paying close attention to budget items in the coming weeks-as soon as the first monthly report lands on your desk.
Keeping track of line items month by month, report by report, throughout 2005 not only can make your work on your 2006 budget less painful, but it can also give you, as an HR professional, a close-up look at how the company is doing. With that perspective, you can decide your spending priorities for next year and even, if necessary, quickly adjust your spending for this year.
Theresa Seagraves, president of the consulting firm Theresa L. Seagraves & Associates in Parker, Colo., says HR managers should review budget reports monthly, or at least quarterly. "Business can change rapidly," she says. "You need to be looking a year in advance to predict what you want to do with your budget."
And keep an eye on every line item related to the HR budget-whether there are four of them or 40, advises Steve Eggers, president of CFO Corporate Services in San Diego. Eggers, who teaches a budgeting course for HR managers at California State University San Marcos, says that by looking at budget reports thoroughly, "you've got a really good idea of what adjustments need to be made" when the 2006 budgeting process begins.
Granted, some think of budgeting "as just an exercise in futility that accounting people do to make other people suffer," says certified management accountant Marion Martelli. When she starts talking about the budgeting process in the classes she teaches for the SHRM Academy -- a business education program of the Society for Human Resource Management (SHRM) -- the HR managers often groan, she says. "But if it's done right, it's like a road map. It's a tool to manage how much cash you're going to get."
That's especially important in tight economic times, when budgets are squeezed and HR managers need to figure out how to stretch their dollars, says Martelli, an associate with Bradley/Lambert Inc., a training and consulting firm in Los Angeles.
And having a full understanding of particular budget items can be important too when making a case for an expense that doesn't produce revenue. For example, a safety program can reduce workplace accidents, but it's important to know the budget figures that show such programs also reduce company outlays by reducing workers' compensation claims, Martelli says. "Soft explanations are all well and good, but you need to [provide] some numbers."
It's important for HR to "show connections" between its programs and the benefits they provide for a company, says Jack Phillips, chairman of the ROI Institute, an organization in Birming-ham, Ala., that provides consulting and research on accountability, primarily in HR. For example, he says, if an HR manager can demonstrate that a new wellness and fitness center is adding value, "it can help us hang on to the budget we have, and maybe increase that."
Find Out Why Numbers Vary
When budget reports land on your desk each month, study each one to find the items with the biggest variances-the biggest discrepancies between what was budgeted and what the actual outlay was. And examine all of the variances-favorable as well as unfavorable-Martelli advises.
Discrepancies can have simple explanations. "Sometimes there's miscommunication about where you planned to have the budget items go and where accounting posted them," Martelli says. Or a discrepancy might be a matter of timing, she says. For example, health insurance premiums might have to be paid in advance for not just one month but for six, so the variance will likely even out over time.
But variances can also reflect judgment errors, and by determining how such errors occurred, an HR manager might prevent them in budgeting for the following year.
Eggers says variances "put up flags that we're starting to run off the road." That means HR managers "need to drill down and take a closer look at that particular line item." However, just because an item comes in under budget doesn't necessarily mean things are going well. A drop in wage outlays, for example, could mean that employees are being sent home because sales have declined and production isn't going as planned-and that could affect HR's budget in other ways, such as overtime costs.
HR managers should look closely at what they can do to reduce variances, some experts advise. If there is an unexpectedly high amount of overtime, for example, it might suggest a need to hire another person. And to cover a deficit in the short run, Martelli says, an HR manager might want to borrow funds from discretionary spending or postpone a departmental function.
Eggers suggests looking at both the absolute numbers and the percentages of any variances to determine their impact on the company. And to find out why variances are occurring, he adds, HR managers should get out from behind their desks and talk with the managers who can provide answers and insight.
Write Down What You See
In addition to examining variances, experts say, HR managers should make notes of what they observe as they go along. Lisa Auerbach, vice president of finance and human resources at Broad Street Community Newspapers in Philadelphia, suggests keeping a simple Word document in the computer that recaps each month's findings.
If health care costs are up $5,000 in a certain month because six new hires joined the payroll the previous month, she says, make a note of it. If hiring more employees caused drug-test costs to go over budget one month, write it down. Or if the numbers indicate that turnover is increasing, note it; there might be a problem in the company that needs to be addressed immediately.
Keeping track on a monthly basis is much easier than getting six months down the road and trying to remember why there were overages in a particular line item. "Budgeting is tough enough without having to spin your wheels," Auerbach says.
Don't Keep The News a Secret
HR's findings about its own budget trends should be shared with others in the top echelons of an organization, Phillips says. "Lots of costs you incur in the HR budget might be things going on in other areas" of the company, such as sexual harassment complaints tied to a supervisor in a particular department.
Corporate leaders also should be apprised of the costs associated with employee turnover, says consultant Seagraves. "There are a lot of hidden costs that upper-level managers just don't calculate."
Seagraves too recommends that budget results be shared with others in the corporation, which can help HR managers gather allies and manage perceptions. If things aren't going according to the budget plan, the HR manager should be the first to know about it so he or she can develop proposals to address the problem. "Still share the news," Seagraves says. "One of the worst things you can do is sit on not-so-great data and surprise people later."
Consider An Alternative Approach
Phillips of the ROI Institute suggests that HR managers think about budgeting along process lines-looking at the activities they undertake to develop a new program or maintain an existing one.
Before implementing a new program, Phillips says, HR managers should take their time and devote some resources to determine if the new program is necessary.
If it's decided that a new program is needed, the HR manager then should compare the costs of designing and developing the program with the costs of acquiring it. For example, if HR is looking for a way to improve retention, the department might design its own solution or pay a consultant to develop one.
Then the manager should consider the costs of implementing the program and making sure that it works, followed by the costs of maintaining the program to ensure that it functions properly.
The final cost would be for evaluating the program to determine its effectiveness and whether it is beneficial for the company.
Phillips says that sometimes programs are introduced with insufficient advance analysis and carried forward with insufficient spending to evaluate their results. "That gets [HR managers] into trouble for not being able to show the contribution" of the program to the company.
Keep an Eye on the Big Picture
HR managers need to stay abreast not only of changes that directly affect their department but also of changes in their particular industry and in the overall economy.
Auerbach of the Philadelphia newspaper group says HR managers need to be aware of changes in the cost of benefits, for example, and determine how costs should be divided between employer and employees. "This could be a pretty huge impact on your budget," she says.
In addition, Auerbach says, HR managers should stay in close touch with other departments, be aware of any company plans to expand or downsize its workforce, and keep tabs on "any unusual things that happened in the current year that should factor into your baseline budget."
Martelli encourages HR managers to look beyond what is happening within their company. "You really have to understand the market," she says. If the unemployment rate is low, for example, it may be harder to recruit the best employees. Look at what the competition is doing, she says, and if you find your company is paying less than competitors are, be aware that you may be hiring less-qualified new workers.
As you look toward the budgeting process for 2006, don't be intimidated, experts say. And don't be afraid to ask for help, says Auerbach, who recommends that you sit down with someone from your company's finance side to go over the budget.
Seagraves takes a similar approach regarding a common concern of HR managers about budgeting: "Get over that fear of estimating," she says. "Every other area of business is using estimates to a certain extent." To estimate well, she continues, "be consistent, be conservative and be thorough enough that you're credible."
And always keep in mind, Eggers says, that budgeting is a flexible process. "Things are going to change," he says. "That's OK. One thing we know about the budget: It will not happen exactly that way."
Susan Ladika, based in Tampa, Fla., has been a journalist for more than 20 years and has worked in both the United States and Europe. Her freelance work has appeared in such publications as The Wall Street Journal-Europe and The Economist.