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Accounting

9 Factors to Consider When Budgeting for Personnel Expenses


by FEI Daily Staff

As you fine-tune your budgeting process and increase your staff level, complexity can get the best of you.

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The largest part of nearly any company’s budget is personnel expenses. Salaries, hourly, overtime, taxes (employee and employer), 401(k) contributions, insurance of every flavor, 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.  As you fine-tune your budgeting process and increase your staff level, complexity can get the best of you.  Below, I’ve outlined nine factors to consider when budgeting for personnel expenses to help you navigate the daunting task that lies ahead.

9 Personnel Budgeting Factors

  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 approach. 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 budget for just one tax and withholding account. 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 turnover increases, you may require more detailed information. Many growing companies will choose to block out two hourly and salaried groups as they typically share similar benefit options.
  3. Annualized Personnel Expense Budgeting – If your payroll is fairly consistent throughout the year, coming up with the year-end numbers and dividing them by 12 is a seamless exercise.
  4. Personnel Budgeting for Seasonal Employees– When your business is highly seasonal, you’ll need to go beyond the “Divide-by-12” method. Reflecting the highs and lows of the season is critical 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. It is important to ensure 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. Personnel 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 makes sense here.
  6. Department Based Personnel Expense Budgeting– Regardless of payroll levels, when you’ve got different operating lines, shifts, and a variety of manufactured products, you want to spread your expenses by department so that you can more accurately see your controllable expenses. If your company is more narrowly focused on one product or service, keep things simple by expensing all the payroll and related expenses to Admin, then allocating it with your overhead.
  7. Outsourcing Personnel Budgeting– When you outsource your payroll to a third party you may feel limited in how you can book the expenses and budget for them. Tracking the expenses can vary 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. Personnel Budgeting with High Turnover Rates– If you’ve got some departments, such as a call center that have a high turnover rate, you can dig deeper into the numbers within the department-level payroll and adjust within that department at the monthly level.
  9. Individually– This may seem impossible for finance professionals who are looking at a spreadsheet during budgeting season. Even with only 50 employees, budgeting for deductions and employee matches (and caps) is daunting.  Rely on budget-specific software that feeds directly into your payroll system to keep up with the selected deductions and tax situations, automates this traditionally painful process.
As companies expand or contract the needs of the business will change.  Having options is critical as you evaluate your budgeting process and determine whether its guiding you toward your true expenses or if it’s time for a change.  These nine factors are helpful to consider as you determine the depth and breadth required of your budgeting process for personnel expenses and can serve as an invaluable guide in strategic decision making.

John Orlando is CFO at Centage Corporation.