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SESSION OBJECTIVES:
Spotting a highlight over:
1. The concept of people / HR cost and the most common cost items.
2. Establishing basic understanding for some financial concepts.
3. Budgeting methodologies.
4. The best practices in preparing an efficient HR budget and the
recommended steps.
5. The best practices in forecasting the most common HR cost items.
6. Deviation analysis and it’s importance for maintaining efficiency.
7. How can HR Budget Process make the HR Function more strategic

HR BUDGET PREPARATION TECHNIQUES-

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WHAT IS MEANT BY “PEOPLE / HR COST”?
From “Activity –Based” perspective, It’s the expenses exerted for
performing all HR activities in an organization.
This includes the cost of:
1. Compensation and Benefits
2. Training and Development
3. Selection and Placement
4. Employee and Labor Relations
5. Health, Safety and Security
6. Other HR special projects / initiatives and consultation fees.

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BASIC FINANCIAL CONCEPTS :
 Direct Labor
Direct labor is any labor specifically used to create a unit of output
For a production company, direct labor would include the wages of the
employees producing the products, as well as supervisors devoted
entirely to a particular product line.
 Indirect Labor
Indirect labor cost consists of the cost of employing all of the employees who
are not specifically assigned to a particular area of product or service
production but you still can link it to production process through a
“charging basis” (Labor cost that you can avoid partially due to
production demand .. i.e: Procurement, warehouse, maintenance.. Etc.)
 SG & A labor:
Selling, General and Administrative Expenses, which is a major non-
production cost (You can not avoid due to production demand).

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WHAT IS MEANT BY “BUDGETING”?
 “Budgeting” is the process of identifying all
influencing cost items and forecasting its
values for an upcoming period of time.

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THE MOST COMMON BUDGETING METHODOLOGIES

1. Incremental budgeting--using the current budget,

a new budget is developed by making
adjustments upwards or downwards to each item
based upon expectations.
2. Zero-based budgeting--every item included in the
budget must be justified before being included;
therefore, the process begins with a clean slate.

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TACTICAL STEPS FOR PREPARING AN EFFICIENT
HR BUDGET:
1) Review your company’s strategy and policies
•To identify cost items (i.e: compensation, benefits, HR initiatives) and
get acknowledged with eligibility rules.

2) Get your manpower plan prepared

•A reviewed headcount (current employees + potential new hires –
estimated turnover) is the base line you shall build your HR budget on

3) Get your training plan ready (If applicable)

4) List the affecting cost items as per company strategy & policy

5) Indicate budgeting methodology for each cost item

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Compensation Training and
and Benefits Development
Gross Basic Salaries For External programs:
Registration fees
Fixed allowances (Salary Add-ups) Travel expenses
Certification exam costs
Co. Share in social insurance
For Internal programs :
Co. share in benefits (each benefit Consulting fees/trainers salary
program solely)
Program materials
Overtime Food and beverages
Supplies for attendees
Incentive / Bonus / Other variable pay
Audiovisual rentals

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 Employee and Recruitment &
Other
Labor Relations Selection
Recognition programs Agency fees Strategic planning
(data/consultants)
Temporary help
Team Building / Annual Events
Employee referral program Charitable donations

Attitude survey administration Skills testing

Performance appraisal software Drug testing
Recruitment-related travel
Employment attorney fees
Giveaways /Brochures/ Printing
Outplacement expenses
Web development/maintenance
HRIS administration
HR
databases/subscriptions/member
ships/books
Intranet design and maintenance

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SO.. WHEN & HOW CAN WE USE EACH METHODOLOGY?!

Despite the fact that generally using zero-based

budgeting might ensure higher level of accuracy,
however you should rely on incremental budgeting as
long as no major changes in the guiding policies or
rules affecting a cost item took place (to ensure
timeliness and utilize effort efficiently).

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TIPS FOR BUDGETING SOME MAJOR COST
ITEMS:
1) Gross salary and related compensation items:
The major factor affecting the payroll cost is inflation (CPI) .. For the past few years in
Egypt most companies sets a budgetary increase rate around 15% (depending on the
overall compa-ration status & available budget as per targeted revenue).
2) Bonus / Variable pay:
A “virtual scenario” should be applied considering eligibility criteria (You may consider
80% for the eligible compensation percentage).
3) Medical Care:
The planned table of benefits and service provider are key factors to forecast the
value.
4) Social Insurance
Fixed annual increase by 7% of the basic S.I salary + variable S.I salary ceiling
adjustment

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CONTROLLING HR COST
“AVOID THE DANGER OF COSTS WITHOUT BENEFITS”
•By investing in hiring the right people, recruitment costs go
Invest in Hiring and down over time and having new hires that are the right
Retention long-term fit with positions can reduce recruiting costs.
(sourcing, recruiting and retention) •Diversify sourcing channels and use multiple evaluation
techniques.

•Set priorities (i.e: medical care vs. pension plan or car

ownership programs)
Evaluate Your Benefits •Perform cost – benefit analysis where applicable
•Use tracking reports supported with satisfaction surveys to
know what works well for your people

Streamline HR Services •Use applicant tracking systems

•Automate personnel / HR operations where applicable.
with Technology •Use talent management systems where applicable (i.e:
success factors).

•Many companies are cutting costs by outsourcing

Outsource Strategically administration of their routine programs (i.e: Casual workers
/ blue collars outsourcing)

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DEVIATION ANALYSIS
 It’s critical to monitor actuals vs. budgeted costs periodically and
report the deviations.
 Deviation analysis (justification) is crucial to maintain your budget
(which is a monetary translation for your operation plan) meaningful.
 Not every saving is an advantage .. It could be a result for inefficient
execution for some programs.
 Not every excess is a disadvantage .. It could be due to new business
expansions.

“The HR budget need to be maintained updated with business changes

to be realistic and meaningful”

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USING THE HR BUDGET PROCESS TO MAKE THE
HR FUNCTION MORE STRATEGIC
Fundamentally, the HR budget is a great opportunity to reposition and reinforce the HR
function as a strategic partner, by embracing the budget process to gain strong
credibility from the executive team.
Adopting the following principles will reinforce the strategic role of HR :
1. HR Initiatives are projects
i.e: Annual pay review, 360 feedback cycle, talent development programs, …etc.
using business strategy to identify the people drivers and HR initiatives that will support
delivery of the strategy, is the best starting point for developing your HR budget.
2. Develop a partnership with the CFO
3. Encourage team ownership
Assign defined budget for each team member and make them accountable for it as far as
you can.

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4. Encourage clarity on people costs
It is tempting to exclude some people related expenses and leave it up to individual
line managers to include in their departmental budgets .. Please AVOID that and
encourage them to keep you engaged as a consultant instead of clashing with them.
5. Be courageous and absorb the real people costs
Take over the responsibility of all HR cost items despite the concerns about ownership
and control promote for that.
6. Provide value to the business
7. HR should often reflect on whether the business would really be willing to pay
good money for some of their services. If not, those are the first services that
should be reviewed during a budget exercise (focus on doing what matters).

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