How to Plan Your Annual HR Department Budget [+Template]

Creating a realistic budget, from start to finish

by Elle Mason - October 31, 2022

HR professionals are always looking for ways to do more with less. After all, the HR department is responsible for a lot of critical functions within a company, from recruiting and onboarding to benefits administration and payroll.

As an HR professional, you know that one of the most important aspects of your job is managing your department’s budget. But what exactly is an HR department budget? How do you create one? And how do you make sure that you’re staying within your budget? Read on to find out.

What Is an HR Department Budget?

An HR department budget is a document that outlines the expected costs of running the HR department for a given period of time, typically one year. The budget allocates funds to different areas of the HR department, with the goal of ensuring that the department has enough money to cover its operational costs and meet its goals. 

Download the Free HR Department Budget Template

At the core, every budget should cover two main types of expenses:

Fixed costs

Fixed costs are costs that remain constant regardless of how much the company produces or sells. For example, if your company leases office space for its HR department, that lease payment would be considered a fixed cost. Similarly, salaries and benefits are also typically considered fixed costs because they don’t fluctuate based on production levels.

Variable costs

In contrast, variable costs are costs that vary in direct proportion to the company’s production or sales levels. For instance, your HR department’s office supply needs will scale as the team grows. Therefore, office supplies are considered a variable cost. 

Why Do You Need an HR Budget?

An accurate HR department budget is critical for ensuring that the department has the resources it needs to function effectively. Without a budget, it would be difficult to track and control spending, which could lead to overspending and potentially putting the entire department at risk. An HR department budget can help with long-term planning by providing a roadmap for future growth and expansion. It’s one of the most certain ways to avoid financial stress that impacts everyone (but especially employees) negatively. It can help HR teams:

  • Prevent understaffing of employees– which causes employee burnout for those who are staffed.
  • Prevent over-hiring of employees – which leads to disengaged and underutilized talent.
  • Prevent or reduce turnover – which can rise when people can’t rely on consistency in pay from their employer.
  • Support employee attraction – by allowing teams to understand what they can offer upfront.
  • Support talent management – by allowing teams to understand what roles they’ll be able to fill and how those roles can help meet the needs of the department.

What is Included In an HR Budget?

HR team salaries and benefits

The HR team budgets for your company should include salaries and benefits such as overtime pay, medical insurance, life insurance coverage (including dental), and retirement contributions. These may be in addition to any other perks you offer like free food or frequent leave.

Hiring and recruitment needs

Your department may spend money on advertising, job boards, relocation costs, or conducting background checks before interviewing prospective candidates – all of which have their role in keeping your hiring processes running smoothly. 

Talent management, development, and training

The HR department is responsible for managing, developing, and training its employees. This can include turnover costs, travel expenses, workshops, courses, certifications, and ongoing employee education.

Employee experience and engagement

Some HR budgets include funds for initiatives, events, or programming designed to build culture, atmosphere or employee recognition.

DEI initiatives

More and more businesses are recognizing diversity, equity, and inclusion as critical investments. HR teams can factor initiatives into their annual budget, like staff training or improvements to make the hiring process more inclusive.

Employee safety and wellness initiatives

Many HR budgets are expanding to include programs to make sure employees feel safe and healthy. These can range from providing healthy snacks in the office or reimbursing workers for exercising outside their work hours.

HR software, tools, and technology

HR budgets should account for software and technology that make the department run efficiently. This includes expenses like laptops, automation software, cellphones, data storage, and more.

How to Create Your HR Budget

Define your goals for the upcoming year

Does your company have aggressive expansion goals that will require an increase in headcount? Of course, this should be factored into the budget – including how you’ll manage onboarding, experience, and retention for the new employees. On the other hand, your company might not have people-related growth plans, and therefore, you’ll only need to consider accounting for standard turnover. Gather data from the previous year

Analyze and forecast workforce growth

How many employees are projected for next year? What is your projected cost of benefits? What is your projected turnover rate? Using last year’s data, create an updated budget or budget proposal that have factored in these questions. For example, if you have a lower projected turnover rate due to engagement and retention initiatives that were successful in the last two quarters, you’ll have an easier time justifying increased investment in those areas. Calculate how much you’ll need to budget for each goal

Allocate funds to specific HR needs

You need to think about the future needs of your department when allocating your HR budget. What new initiatives will your department be undertaking in the coming year? What new technologies will you need to implement? What additional staff will you need to hire? Is your onboarding process as efficient as it could be? By taking into account future needs, you can ensure that your department has the resources it needs to be successful in the years to come. 

Create different tiers of plans

Ideally, you should have a conservative plan, a safe plan, and an optimistic plan. Your conservative plan should be the barebones of what your department needs to function. Employee salaries, pay, standard benefits, etc. are all key here. This can be used if an event occurs that shifts the organizational financial outlook to the negative side. The safe plan can be the standard plan: What do you need and what would you like to offer assuming everything goes similarly to how it’s gone in the past? And lastly, the optimistic plan: If the company does even better than the financial projections estimate, what would be your budget in an ideal scenario? Having all of these laid out in advance can ensure that regardless of what occurs, you have a strategy and plan in place to manage it.

Present the plan to leadership and get approval

Once you’ve determined and finalized a budget, it’s ideal to determine who within senior leadership can review and approve the budget. You can also make this person (or team) aware of your key 1-3 top goals, to help ensure that the budget remains intact and that the funds flow as allocated in the plan. This can also ensure budget security in the event of future restrictions, as you’ll have other advocates speaking on your department’s behalf.

Revisit and adjust as needed throughout the year

You’ve probably put a lot of time and effort into creating your department’s budget for the year. But what happens if things change? What if you get more employees than expected or have to deal with a string of unexpected resignations? Suddenly, that carefully crafted budget doesn’t look so realistic anymore.

That’s why it’s important to revisit and adjust your HR budget throughout the year, at least quarterly. By doing so, you can ensure that your department has the resources it needs to be successful regardless of what unexpected changes come your way.

How HR Software Can Help You Manage and Automate Your Budget

Managing an annual HR budget can be a daunting task, but using the right tools can make it much easier. HR software can help you automate and track your budget, as well as keep tabs on employee data and performance. If you’re looking for a comprehensive solution that will help you manage your entire HR department, we recommend taking a tour of GoCo. Our software is designed to make life easier for busy HR professionals like you, so you can focus on what’s important – making sure you have happy, healthy, and productive employees!

See how GoCo can simplify your HR