You’re deep into your year-end close and to keep from being overwhelmed, isolating one piece of the pie to focus on is the best way I’ve found to manage my work when things get harried. The area I’d like you to zone in on this week is payroll budgeting.
With W2’s and 1099’s to prepare shortly, it’s a good time to look at how your year-end numbers for payroll and benefits played out against last year’s budget. What kind of impact did they have on your cash flow forecast last year? Did payroll create an unexpected shortfall? Were there any jumps or dives that weren’t accounted for in your 2015 budget?
To an outsider, budgeting for payroll is deceptively easy. Multiply your FTE wages by 1.25 to account for taxes and benefits and divide everything by 12 to get to your monthly budget, right? That may work as a good rule of thumb for really small companies or as a high-level guess for filling out a survey form but usually that’s not enough detail if you want (and need) your budget to be as accurate as possible and really used to manage your cash flow and your business.
The Layers to Payroll Budgeting
You could annualize everything and pretend there’s no turnover, no retirements anticipated, and no year end bonuses. While you’re pretending you might want to forget about taxes too. It’s pretty rare to have a thriving business where there aren’t at least a few executives who hit the FICA cap in the 2nd or 3rd quarter. Their (and your) 401(k) contributions are likely to be maxed out along the way as well. Seasonality and part-time workers can throw a wrench in your payroll planning process too. Will each of your department heads be able to get to that layer of detail and still have some time available to do their day jobs?
When you dig deep into the layers of taxes and benefits, budgeting for payroll can get quite tricky. It’s been a while since I had to consider accounting for all of that within Excel spreadsheets. I can’t imagine going back to that but I know many of you use spreadsheets as your budgeting tool so I wanted to get fairly detailed to make sure you hit the mark when you look at your 2016 payroll budget. Where do you need to make revisions to get your cash flow forecast as accurate as possible?
What we’ve talked about up until now are for a run-of-the-mill operation. Are you adding a product line and new trainers to go with it? Are you discontinuing one where its margin just isn’t the best use of your resources? Is a new location in your near future? Will that 15% growth that the owners anticipate require additional personnel to support it?
And then there’s the holy grail of how many businesses grow – through mergers and acquisitions. Blending a new company into a consolidated forecast mid-year, while often profitable, isn’t any fun. Make sure that when you combine the forecasts that you consider duplicated positions and attrition fallout during the merger. Getting the payroll dollars themselves right is a formidable challenge but you’ll want to make sure the appropriate adjustments to your tax and benefit forecasts are accounted for as well.
Go ahead and wrap-up 2020 but also take some time this week to evaluate your payroll budgeting software so that 2021 doesn’t bring about any unwanted surprises.
Centage Corporation’s Planning Maestro is a cloud-native planning & analytics platform that delivers year-round financial intelligence. With Planning Maestro, Centage offers the sophisticated features needed by small and mid-market organizations to integrate budgeting, forecasting, and deep data analysis within one easy-to-use, scalable SaaS solution. For more information on how to modernize your office of finance with intelligent planning, view our product demonstration video, or call 800-366-5111.