How to Plan Your Annual HR Department Budget [+Template]

HR professionals are always looking for ways to do more with less. After all, the HR department is responsible for many critical functions within a company, from recruiting and onboarding to benefits administration and payroll.

As an HR professional, you know that managing your department's budget is one of the most critical aspects of your job. But what exactly is an HR department budget? How do you create one? And how do you make sure that you're staying within your budget? Read on to find out.

What Is an HR Department Budget?

An HR department budget is a document that outlines the expected costs of running the HR department for a given period, typically one year. The budget allocates funds to different areas of the HR department to ensure that the department has enough money to cover its operational costs and meet its goals.

At the core, every budget should cover two main types of expenses:

Fixed costs

Fixed costs remain constant regardless of how much the company produces or sells. For example, if your company leases office space for its HR department, that lease payment would be fixed. Similarly, businesses usually classify payroll and benefits as fixed costs because they don't fluctuate based on production levels.

Variable costs

In contrast, variable costs are costs that vary directly to the company's production or sales levels. For instance, your HR department's office supply needs will scale as the team grows. Therefore, office supplies are considered a variable cost.

Why Do You Need an HR Budget?

An accurate HR department budget is critical to ensure the department has the resources to function effectively. Without a budget, it would be difficult to track and control spending, which could lead to overspending and potentially putting the entire department at risk. An HR department budget can help with long-term planning by providing a roadmap for future growth and expansion. It's one of the surest ways to avoid financial stress that negatively impacts everyone (especially employees). It can help HR teams:

• Prevent understaffing of employees– which causes employee burnout.

• Prevent over-hiring of employees – which leads to disengaged and underutilized talent.

• Prevent or reduce turnover – which can rise when people can't rely on their employer's consistent pay.

• Support employee attraction – by allowing teams to understand what they can offer upfront.

• Support talent management – by allowing teams to understand what roles they'll be able to fill and how those roles can help meet the department's needs.

What Should You Include In an HR Budget?

HR team salaries and benefits

The HR team budgets for your company should include salaries and benefits such as overtime pay, medical insurance, life insurance coverage (including dental), and retirement contributions. These may be in addition to any other perks you offer, like free food or frequent leave.

Hiring and recruitment needs

Your department may spend money on advertising, job boards, relocation costs, or conducting background checks before interviewing prospective candidates - all of which have their role in keeping your hiring processes running smoothly.

Talent management, development, and training

The HR department manages, develops, and trains its employees. This can include turnover costs, travel expenses, workshops, courses, certifications, and ongoing employee education.

Employee experience and engagement

Some HR budgets include funds for initiatives, events, or programming designed to build culture, atmosphere, or employee recognition.

DEI initiatives

More and more businesses recognize diversity, equity, and inclusion as critical investments. HR teams can factor initiatives into their annual budgets, like staff training or improvements, to make the hiring process more inclusive.

Employee safety and wellness initiatives

Many HR budgets are expanding to include programs to ensure employees feel safe and healthy. These can range from providing healthy snacks in the office or reimbursing workers for exercising outside their work hours.

HR software, tools, and technology

HR budgets should account for software and technology that make the department run efficiently. This includes expenses like laptops, automation software, cell phones, data storage, and more.

How to Create Your HR Budget

1. Define your goals for the upcoming year

Does your company have aggressive expansion goals that will require an increase in headcount? Of course, this should be factored into the budget – including how you'll manage onboarding, experience, and retention for the new employees. On the other hand, your company might not have people-related growth plans, so you'll only need to consider accounting for regular turnover.

2. Analyze and forecast workforce growth

How many employees do you project you'll hire next year? What is your projected cost of benefits? What is your projected turnover rate? Using last year's data, create an updated budget or budget proposal that has factored in these questions. 

For example, suppose you have a lower projected turnover rate due to engagement and retention initiatives that were successful in the last two quarters. In that case, you'll have an easier time justifying increased investment in those areas. Calculate how much you'll need to budget for each goal.

3. Allocate funds to specific HR needs

It would help if you thought about the future needs of your department when allocating your HR budget. What new initiatives will your department be undertaking in the coming year? What new technologies will you need to implement? What additional staff will you need to hire? Is your onboarding process as efficient as it could be? By considering future needs, you can ensure that your department has the resources it needs to succeed in the years to come. Be prepared to explain the potential return on investment (ROI) from investing in these tools or initiatives.

4. Create different tiers of plans

Ideally, you should have a conservative plan, a safe plan, and an optimistic plan. Your conservative plan should be the essentials your department needs to function. Employee salaries, pay, standard benefits, etc., are key here. You can use this if the organization's financial outlook shifts negatively. 

The safe plan can be the standard plan: What do you need and what would you like to offer, assuming everything goes similarly to how it's gone in the past? And lastly, the optimistic plan: If the company does even better than the financial projections estimate, what would be your budget in an ideal scenario? Having all of these laid out in advance ensures you have a strategy and plan to manage it regardless of what occurs.

5. Present the plan to leadership and get approval

Once you've determined and finalized a budget, it's ideal to decide who within senior leadership can review and approve it. You can also make this person (or team) aware of your key 1-3 top goals to help ensure that the budget remains intact and that the funds flow as allocated in the plan. This can also ensure budget security in the event of future restrictions, as you'll have other advocates speaking on your department's behalf.

6. Revisit and adjust as needed throughout the year

You've probably put a lot of time and effort into creating your department's budget for the year. But what happens if things change? What if you get more employees than expected or have to deal with a string of unexpected resignations? Suddenly, that carefully crafted budget doesn't look so realistic anymore.

That's why it's essential to revisit and adjust your HR budget, at least quarterly, throughout the year. By doing so, you can ensure that your department has the resources it needs to be successful regardless of what unexpected changes come your way.

How HR Software Can Help You Manage and Automate Your Budget

Managing an annual HR budget can be daunting, but using the right tools can make it much more manageable. HR software can help you automate and track your budget and keep track of employee data and performance. 

If you're looking for a comprehensive solution to help you manage your entire HR department, we recommend booking a free demo of GoCo to see how our software can simplify your HR processes. Our software makes life easier for busy HR professionals like you, so you can focus on what's important - ensuring you have happy, healthy, and productive employees!

Updated 12/11/2024