By Andrew Childress
Budgeting season is just around the corner. The best budgets represent the views of many, and tell a story about the trajectory of your business. This annual exercise is a chance to put pen to paper and capture your plans for the next year.
For many companies, people cost (labor, bonus, and benefits) is the single largest part of their cost structure. Detailed labor budgets help a company plan key projects and set their growth plans.
The importance of your labor budget is key to creating a great budget. Let’s look at five tips that every Financial Planning & Analysis (FP&A) team can benefit from during budget season.
5 Tips for Better Labor Budgeting For Your FP&A Team
Feeling lost as budget season is beginning? You’re not alone. With many employees, cost centers, and factors to consider, you need tips for success. Let’s look at five tips you can use to guide your budgeting process.
Remember Open Headcount Roles
Many budget processes use historic data to project the future. Instead of building every component of the budget from the ground up, you can lean on recent spend levels to build up the future.
History is important to remember. It’s a good practice to use the recent months’ run-rate as the building block. However, history isn’t a perfect representation of the future. One key example of this is open headcount, jobs that are not currently in your cost data.
That’s why it’s important to budget these as additions to that run rate. Think about these types of open headcount as you build out your labor budget:
- Vacant roles – these are seats that might be open temporarily. That could include open job postings for employees that have recently left or employees who are on leave. You can’t miss out on budgeting their cost.
- Approved new headcount – if you’re in growth mode, it’s likely that you’re adding new roles. Work through HR, management, and department leaders to ensure that these roles are budgeted and included in the plan.
- Potential new headcount – every department manager is bound to have a list of “asks” to grow their team. Bring these up as part of a list of requests to upper management, with clear benefits articulated for the purpose of each role. That could include cost savings, new product development, or increased sales.
It’s a great idea to use recent history as your baseline. But, it’s also important to consider what roles to add to that baseline. Ensure that you consider open headcount as you work to budget your labor costs.
Budget Employees by Cost Driver
Most companies have a mix of hourly and salaried employees. That means that you have a mix of costs that are fixed (always the same) and variable (change based on a factor like hours worked.)
It’s crucial to budget employees with this in mind. If you have a base of employees that consistently work overtime, you can’t simply budget them as if they’re always at 40 hours per week.
If you don’t have consistent data for hourly employees, it might be time to invest in a tool for project time tracking and approving time. Too many companies have a network of disconnected spreadsheets for hourly time keeping. This costly method of time tracking leads to extra work hours needed to consolidate and maintain disconnected time tracking tools.
In contrast, a project time tracking tool can help you save time and resources on consolidating, organizing, and analyzing data. It also makes it an absolute breeze to capture and approve time entries.You can then leverage this data to estimate how much to budget.
Here’s another important cost driver to consider: non-labor impacts like benefits and bonus. Look to your contact about employee benefits to consider healthcare and retirement costs per employee. Then, make sure you have an appropriate bonus pool budgeted based on management discretion.
Ask For Manager Input
The best budgeting processes are collaborative. Too often, budgets are seen as a product created by finance.
That’s why it’s important to get managerial input. Not only will your budget include information that is otherwise missed, your team will thank you for involving them.
Here’s an idea: set up a series of budget meetings with your team. Present them with a cost report that will serve as the budgeted baseline, then discuss any needed changes. Ask leading questions such as “how will your group change over the next 18 months?” so that you find out the needed budget changes.
While you get input, you might be faced with conflicting opinions. That could include managers who want to grow their departments in terms of headcount and cost. This input is still important to capture, but you may not be able to accommodate every request. Costs must be controlled in any environment, so use this as a “wishlist” balanced with the rest of your budget process.
Remember: financial planning and analysis is ultimately about partnership. That means that we leverage our financial skills to help the business achieve their goals.
Align to Your Total Financial Goals
One of the key ways that budgeting goes wrong is when it’s disconnected from company goals.
Here’s an example: your software engineering leader isn’t anticipating any incremental hires. But, the sales and product organizations have a robust product roadmap in mind. This represents a disconnect. Your budget is a chance to get everyone aligned.
As a finance professional, you are at the hub of your organization. You talk to many across the company and have the opportunity to bring everyone together. Ideally, this happens all the time, but the budget can serve as an agreed-upon rally point.
I think of this as the key to successful budgeting. Each of your departmental budgets must take into account the overall goals. As you budget company expenses, you also need to include an outlook of revenue and any new initiatives in the company.
Budget for Inflation
We know that the cost of goods and services tends to increase over time. That’s the fundamental truth known as inflation. And in 2022, inflation has never been a hotter topic.
That means that it’s crucial to include inflation in your budget process. Building in inflation accounts for this natural motion by which cost increases.
Many FP&A professionals shy away from budgeting inflation. After all, it’s unknown how much to budget. But what we know for sure is that inflation won’t be zero. If you leave it unbudgeted, you’re already behind as soon as the subsequent year begins.
Spend time researching inflation forecasts. There will never be a consensus on this figure, but leveraging several data points will help you build an estimate to your budget. After you’ve determined an appropriate percentage, apply this to your cost at the end of the budgeting process.
Tip: if you operate across many geographies, ensure you take this into account. Not every region will have similar levels of inflation, and it’s important to budget these based on local inflation projections.
So, what happens if inflation plays out differently than anticipated? That’s okay, too. As the next year plays out, monitor inflation statistics released by central banks and other official entities. You can use those figures to benchmark your budgeted amounts versus actual. Build that line into your variance explanations, and your business partners will thank you.
Ready, Set, Budget!
Now that you’ve got tips for great budgeting, you can move forward with confidence. Remember that your budget is an opportunity to come together as a team and present what you believe about the future.
Don’t forget: a budget is a collaborative process. Involvement is the magic that takes your budget from a spreadsheet to a shared vision. Follow our tips so that every part of your labor budget is covered.
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