For most businesses budgets aren’t suggestions or wish lists, they are real guidelines with an absolute upper limit on how much can be spent. On the other hand, even though nobody wants to go over budget, they also don’t want to be too far under budget. Being under budget by too much usually means that opportunities for growth or improvement have been missed. Missing such opportunities can make CEOs and lines of business execs crazy.
Human resources budgets are notoriously inaccurate, through no fault of the HR team. HR budgets typically include annual headcount, however companies don’t accurately predict exactly when hiring will take place. Too many factors inside and outside of the organization impact hiring timing. Things take longer than planned, and in today’s tight labor market, the problem of underdelivering on hiring is only likely to get worse.
This is often exacerbated when companies underestimate the amount of employee attrition that will take place over the course of a year. Often, budgets are assigned to staff who don’t remain with the organization for the entire year.
Another issue injecting uncertainty into HR budgeting occurs when companies lose track of employees that are transferred from one business unit to another. When these different BU’s have different accounting systems, it takes way too long for budgets to keep up and resolve on the organizational level.
For these reasons, it’s common to pad HR budgets to ensure that workforce needs aren’t in jeopardy of being underfunded. Between the padding and poor timing, the likelihood of being close to reality diminishes.
All of this is made even worse by the fact that companies don’t have an accurate way to understand exactly what impact headcount has on cash and profits. Companies typically use averages based on backward-looking data (lagging indicators) to determine average commissions, average bonuses, average pay increases, average costs of benefits, etc. But since we do know that the past doesn’t necessarily match the future, HR managers add budget variances based on even less precise criteria.
Of course, healthy and conservative budgeting is not a bad thing. Every dollar saved does go straight to the bottom line. But companies don’t save their way to growth. For companies with a top line growth goal, knowing funds were available for new initiatives or accelerated marketing but were tied up as padding in the HR budget can make executives question the business savvy of their HR peers.
So what can HR executives do to gain credibility and trust with their peers, particularly those in the finance department who typically look after budgeting? Using advanced workforce planning tools, such as the PredictiveHR platform, will enable HR to gather critical HR data from across business units and use that data to develop predictive models. These models can be tested against past actual data, which will prove its accuracy to executives in finance, operations, and sales - increasing those executives’ trust in their HR colleagues.
With better numbers and more accurate timing, HR can fine tune their budgets – budgets that often represent the largest share of expenses for most organizations – freeing up capital for other mission critical initiatives inside the organization.