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9 Factors to Consider When Budgeting for Personnel Expenses

July 21, 2020
Workforce Planning
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The largest part of a budget for any industry is personnel expenses. Often, it’s the same for any other type of business. Salaries, hourly, overtime, taxes (employee and employer), 401(k) contributions (theirs with one cap and yours with another), insurance of every flavor- life, medical, dental, etc, charity contributions, employee stock purchases, garnishments, pre-tax items, post-tax items, holiday pay, sick day pay, vacation pay…and the list goes on. And on.Is your head spinning yet? And this list is just covering payroll expenses and deductions. Let’s avoid the whole employee engagement, employee surveys, staff parties, and of course the impact of COVID-19 and remote employees and office space. Budgeting for personnel expenses is similar in that there’s a lot to consider. As you fine-tune your budgeting process and increase your staff level, complexity can get the best of you. Consider these factors as you head into budgeting season:

1. Budgeting for Personnel Expenses With Few Employees –

If you have a small number of employees, budgeting for payroll by lump sum is likely the easiest way to go about it. You can tag a number as your gross payroll and have the other calculations of expenses feed off that driver or you may choose to have a gross payroll amount and just one tax and withholding account that you budget for. How fine-tuned you want and need your  budget to be will dictate those decisions.

2. Personnel Budgeting in Two groups –

Hourly and Salaried. As your turnover increases with the number of employees you have, you may see a need to get more detailed. Many growing companies will choose to block out the two hourly and salaried groups since they normally share similar benefit options.

3. Budgeting for Annualized Personnel Expenses –

If your payroll is pretty consistent throughout the year, coming up with the year end numbers and dividing them by 12 is a pretty painless exercise.

4. Budgeting for Seasonal Employees –

When your business is highly seasonal, such as needing to hire additional staff when crops are ready to be harvested, tax due dates are approaching, or having an influx of employees during the Holiday season, you’ll want to go beyond the Divide-by-12 method. Reflecting the highs and lows of the season helps you whether you book on a cash or accrual basis so you can see that the revenues are also heightened when your payroll expenses are up. Accounting for seasonality is also very important for your cash flow budget. You’ve got to make sure your inventories support the anticipated sales and that the payroll is tracking with both of them. Being short on cash without a plan isn’t good for any business.

5. Budgeting By Pay Grade

Businesses that have more staff often structure their pay rates into Pay Grades. Tallying up the numbers needed at the different levels can make sense here.

6. Department Based Personnel Expense Budgeting

Regardless of your payroll levels, when you’ve got different operating lines, shifts, and different products you manufacture, you likely want to spread your expenses by department so that you can better see your controllable expenses. If you’re more of a one product or service organization, you’d probably want to keep things simpler by expensing all the payroll and related expenses to Admin, then allocating it with your overhead if it’s a fit for you.

7. Budgeting for Personnel Expenses for Outsourced Personnel

When you outsource your payroll to a 3rd party you may feel limited in how you can book the expenses and budget for them. Tracking the expenses here can vary a bit as you may want to record your labor expenses at the department level and the lump-sum employee match numbers and tax withholdings as Admin expenses.

8. Budgeting for Personnel Expenses for High Turnover Rates

If you’ve got some departments such as a call center, that have a high turnover rate as compared with your Sales team, you can dig deeper into the numbers within the department level payroll and adjust them within that department at the monthly level.

9. Individually

This may seem impossible for finance professionals who are looking at spreadsheets during budgeting season. Even at a level of 50 employees, budgeting for their deductions and the employee matches (and caps) could seem daunting. If your company has been able to advance into using budget-specific software, depending on which you buy, the process of budgeting at an individual employee level could actually be painless. If you’ve got a feed from your payroll system to your budgeting system to keep up with the selected deductions and tax situations, then it’s even easier since there’s so manual entry, just validation.How deep and detailed you go in budgeting for your personnel expenses will be up to you and your executive team but it’s great to know that you have options. As companies merge and expand… or contract… the needs of your business will change. Keep your eye out for the 9 factors above and let them help guide you in your decision making.Can you get as much detail into your personnel budget as you want? You may want to take a look at your options if your budget isn’t guiding you toward your true expenses.

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