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Don't look at budgeting as a necessary evil but as an opportunity to demonstrate HR's value.
After university studies heavy in math and 30 years in the HR business, David L. Edwards, SPHR, chief administrative officer at Oneda Corp., was relatively comfortable with the facts and figures of budgeting.
But he has found that to bolster his credibility in presentations with the chief executive officer and chief financial officer of the Columbus, Ga., metal stamping and tool and die company, he has had to learn how to "talk the talk. It doesn’t mean you’ve got to be a financial whiz. You’ve just got to be able to talk finance to people. It’s just like Spanish or German or anything else. If you know some of it and are comfortable with it, you fit right in."
This has become essential in today’s world, where HR has an increasing role to play in corporations strategic initiatives. Budgeting shouldn’t be viewed as a tedious process to be tolerated once a year, but as a way for HR professionals to reflect their companies' goals and help make their own mark on the bottom line. "Budgeting is a chance to closely link your budget to the organization's success," says Kevin Berchelmann, SPHR, president of the management consulting firm Triangle Performance LLC in Bellaire, Texas.
Yet only 20 percent of the HR departments that David DeWetter, a consultant with Watson Wyatt, works with have a good grasp of budgeting. He says that the remaining 80 percent are struggling with one--or many--aspects. He points to three main problem areas:
Accurately capturing what is in and not in the budget, since HR departments operate very differently. Some outsource many functions; others outsource only bits and pieces. Or a company might use an outside vendor to do its payroll but charge that to the HR budget or the operational budget.
Determining how HR employees spend their time. While they know exactly how many people are in the department and what costs are, many people are multitasking.
Evaluating how much non-HR departments spend on HR-type activities, such as training.
These issues often aren’t cut-and-dried, so there’s no cookie-cutter, one-size-fits-all way to budget. "It’s not all their fault," DeWetter says. "HR is one of the functions in the organization ... that doesn’t have complete control over what gets spent."
There are wide variations among organizations as to what falls within He’s budget, and what doesn’t, agrees Marion Martelli, a certified management accountant who teaches for the SHRM Academy, which offers classes on business skills in areas such as strategy, negotiation, finance and communications. A corporation may make allocations to HR and other departments, such as facility maintenance, based on head count or square footage, says Martelli, an associate with Bradley/Lambert Inc., a training and consulting firm in Los Angeles. Or HR might make allocations like salaries and benefits to various departments.
Three Main Pieces
When developing a budget, Berchelmann breaks it down into three categories--internal budgeting, operational budgeting and organizational budgeting.
Internal budgeting determines how much HR will spend during the budget year for items ranging from payroll to paper clips. These are items billed directly to HR that involve day-to-day management of the department as well as HR projects such as a compensation survey or succession planning.
Operational budgeting includes expenses run by HR but charged to the business units. These might include hiring expenses such as advertising, testing or travel. So if a call center wants to host a major job fair in another city and hire 60 people in 30 days, the costs are charged back to that operational unit. Berchelmann recommends that HR managers spend time with other departments to get a feel for how HR affects areas like sales and manufacturing, and where various departmental budgets intersect.
The third category--organizational budgeting--is designed to show what HR is planning to do to further the organizations goals. Programs here involve either cutting costs or raising the budget, such as spending more money on companywide training to boost productivity or revamping the incentive plan for all employees.
"If you really want your operations to get investment money to do big things, you need to stick your neck out there a little bit" and then back it up with solid financial data, Berchelmann says. That investment is easier to obtain if HR managers have a good track record for similar projects.
Robert Connolly, an associate professor of international finance and economics at the University of North Carolina who teaches a Society for Human Resource Management-sponsored "Business of HR" seminar, says that if HR managers are trying to get money for a new project, they should portray it not as a cost but as an investment that will make money for the company in the long term.
He recommends sitting down with the CFO to discuss how the financial group likes proposals for new projects to be drawn up, and then asking to look at several successful proposals to use as a template.
If HR wants to introduce a program to reduce turnover, for example, it should show the direct costs associated with searching for new talent and training new hires, and the indirect costs of losing someone it doesn’t want to lose, Connolly says.
An HR manager needs to be able to show "here’s how I can quantify direct and indirect costs when we lose people," using metrics to make the case, he says.
Once a budget is adopted, however, HR managers must realize that it isn’t set in stone. "You’ve got to be agile," says John Sullivan, a professor of management at San Francisco State University. Rather than drawing up a budget annually and then forgetting about it, managers have to be prepared to update it quarterly and change gears as necessary.
If the unemployment rate is going down, for example, turnover is likely to rise, so HR should take that into account and expect to revise its recruiting budget. It also should keep an eye on what competitors are doing because any loss of customers could hurt the company’s bottom line.
This year, Edwards has had a stark reminder of how HR budgets and strategies may constantly need to be revised. Oneda primarily makes parts for vehicles. It might involve bending and shaping sheet metal for electronic components, or creating brackets for GM trucks and SUVs which were huge sellers until high gasoline prices curtailed demand. "We didn’t anticipate [the sales drop] at the end of [last] year," Edwards says.
Thus, Oneda faced a summertime lull while automakers geared up to produce hybrids and other smaller vehicles. As a result, there was an impact on the company’s revenue, and HR had to respond by slowing down hiring and letting go of new employees who hadn’t done well in training.
But because business was expected to pick up Aug. 1 with a $200,000 sales increase for the rest of the year, HR had to be prepared. Edwards says that when he makes a case for hiring new people, he presents it in terms of how much the company will gain in productivity. For example, hiring someone six weeks in advance will mean that she will be at 50 percent of normal productivity when Aug. 1 rolls around; hiring someone six months in advance will put her at 80 percent of productivity.
"HR has to fit in with company finance," Edwards says. "Things change, and if you know a little more about finance you can deal with it and it doesn’t throw you so much."
In addition to external economic factors, it is crucial to know what’s going on in the rest of the organization that might affect HR's budget, says Martelli, such as the addition of another shift or launch of a major sales promotion.
She urges HR managers to review end-of-the-month financial reports throughout the year and compare them to the projected budget to make sure projections are on target. If a category is vastly different than expected, the HR professional should check whether it’s a timing issue with expenses or actual overspending.
To help in this review, if several items are lumped together in one line item, Martelli suggests working with the accounting department to split them out so HR has the most detailed picture possible of the spending. For example, the benefits budget might include everything from holiday pay to dental benefits. In reality, costs for only one of the items might be rising while others are stable. "You need details as low down as you can get," Martelli says.
The Big Picture
The details help show the historical context of past years' budgets, suggests Phillip Daniels, SPHR, HR manager at Montgomery College in Maryland. For instance, if a certain line item has gone up every year and then suddenly goes down, it doesn’t necessarily mean it will continue to decrease the following year.
DeWetter also cautions against simply extrapolating from last years budget. Sometimes HR managers are told to cut 10 percent from the budget, so they just cut all budget lines by that amount. While that may be easier because HR managers "don’t get into the political games of justifying" why something was cut by 20 percent and something else wasn’t touched, "you are abdicating your responsibility," DeWetter says.
To get buy-in within the department, HR managers should make sure everyone participates in some way in the budget process, and then should hold each individual accountable for a certain budgetary aspect, Martelli says.
Setting and ongoing monitoring of a budget paves the way for dialogue with business unit managers, the CFO and the CEO. HR shouldn’t shortchange this opportunity to demonstrate how its programs add value to the bottom line.
Susan Ladika has been a journalist for more than 20 years, working in both the United States and Europe. Now based in Tampa, Fla., her freelance work has appeared in such publications as The Wall Street Journal-Europe and The Economist .
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