HR Budget Planning Explained: What to Do and What to Avoid

Imagine an effective HR budget planning system that helps you balance your staffing needs with funding limitations. It would be even better if you could forecast salaries across grants or programs, budget for unfilled positions, and plan for changes in the cost of benefits. 

With such smart HR budgeting, you can enhance cost control, retain top talent, and foster financial sustainability. 

To budget for personnel effectively, you can use specialized budgeting and financial management software. 

For example, Martus allows you to create detailed HR budgets for both employees and contractors. You can even build unlimited budget scenarios, which helps when it comes to forecasting and reforecasting personnel budget needs as your nonprofit changes. 

Sign up for a Martus demo today to learn more about streamlining your budgeting process. 

What Is HR Budget Planning?

HR budget planning refers to creating a sound financial plan for managing human resources expenses to ensure you allocate resources efficiently according to the organization's mission. 

The process involves creating a detailed personnel budget, considering all factors that influence HR costs, aligning the budget with your mission, and presenting it for board review and approval. 

You need to track staff based on programs, functions, or grants to ensure that you allocate resources effectively, promote financial accountability, and comply with funding requirements. 

The Importance of HR Budget Planning for Organizations

HR budget planning is important for nonprofit organizations as it ensures efficient resource allocation, cost control, and alignment with the organization’s goals. Let's go over the benefits in detail. 

• Strategic Alignment: A well-defined nonprofit HR budget ensures your HR activities directly support your organization's overall strategic plan and mission. It helps prioritize HR initiatives with the highest impact on your goals, ensuring you use limited resources where they are most needed. 

• Supporting Financial Transparency: When you proactively budget for recruitment, compensation, and benefits, you can avoid delayed hiring and underfunded benefits. Your financial decisions around people will be intentional and visible to all leaders. 

• Supporting Board Accountability: Personnel budgeting that aligns with staff forecasts and strategic goals can demonstrate how you are investing in talent to achieve your mission. You can mitigate unplanned attrition by ensuring you have resources for engagement and retention, providing clear accountability to the board and other stakeholders. 

• Improving the Use of Restricted Funds: Proper HR budgeting ensures you use restricted funds accordingly by assigning them to the right people in the right roles at the right time. The compliance risk reduces, and you can also avoid burnout by funding adequate staffing and support systems. 

Key Components of an Effective HR Budget

An effective HR budget allocates resources to critical areas such as:

• Salaries and Wages: You must forecast and allocate costs for employee compensation, including basic salaries and wages, bonuses, and overtime payments. 

• Taxes and Benefits: Your human resources budget must include payroll taxes at both the state and federal levels. You should also estimate expenses for employee benefits such as health insurance, retirement plans, and paid time off. 

• Recruitment and Onboarding: You'll need to budget for costs related to attracting, hiring, and onboarding new employees. 

• Training and Development: The budget should include the costs associated with training programs and professional development opportunities for your staff. 

• HR Technology: You should allocate resources for HR software, Human Resource Information Systems (HRIS), and other technology needed for HR operations. 

• Employee Relations and Engagement: In your budget, include plans for activities and programs meant to boost employee morale and motivation. 

• HR Operations: Budget for costs associated with general HR administration, including compliance activities, background checks, and other operational expenses. 

• Contractor Costs: You should include fees for external consultants or specialized service providers, such as HR consultants on employment contracts and labor laws. 

To keep track of all these components, you'll want to tag expenses by program or department, which will make reforecasting and financial reporting easier and more accurate. 

How to Create an Effective HR Budget

You'll need careful planning, goal alignment, and regular monitoring to create an efficient HR budget. Here's how to make one:

1. Forecast Headcount Needs: Identify how many roles your organization will need over the next fiscal year. Some critical points to consider include planned growth, mission-critical vacancies that must be filled, and temporary or program-based staffing needs. You can liaise with the department heads to understand program goals and timelines that influence their staffing needs. 
2. Consider Historical  Data and Trends: Use past data to inform future planning. Consider aspects such as attrition rates to anticipate backfills, annual increases due to changes in the cost of living, and trends in the use of benefits and compensation. 
3. Build in Buffers for Hiring or Turnover: Include contingency funds for delays or acceleration in hiring, unexpected resignations, recruitment costs, and interim staffing. 
4. Align the Budget with Program Timelines and Funding Cycles: Ensure your budget accurately reflects grant requirements, seasonal changes in workload, and the timing of staff onboarding to meet program milestones. The alignment will help you avoid funding gaps and staffing shortages. 

As you create your budget, remember that effective HR budgeting requires collaboration to support both financial sustainability and organizational impact. 

HR brings the workforce planning and policy, while finance helps with cost modeling and budget controls. Your program leads will help align staffing with funding timelines and operational needs. 

How Martus Solutions Simplifies HR Budgeting

As a nonprofit, you must balance restricted funds, allocate staff time across multiple programs, and keep the HR team aligned with the rest of the departments. 

Martus Solutions can help you streamline your HR budgeting process through:

• Salary Reallocation Across Programs and Funds: Martus automates calculations and helps you distribute salaries and benefits across multiple grants, funding sources, and departments. 

• User-Level Access for HR vs. Finance: With Martus, you can customize access based on roles to reduce cross-department confusion and protect sensitive data. The HR lead can manage staffing details and position planning, while the finance lead controls funding and budget assumptions. 

• Real-Time Salary Forecasting Tied to the Overall Budget: Martus connects your HR budgeting directly to your overall organizational budget so you can see the impact of changes in staffing in real time. You don't have to struggle with manual updates or version control issues regarding human resources costs. 

Unlike manual spreadsheet-based processes, which are prone to errors, time delays, and version confusion, Martus automates calculations and integrates compensation planning. 

You can enjoy reduced errors, faster planning cycles, and better decisions based on real-time data. 

Gain financial clarity and make smarter decisions with Martus today. 

Common Challenges in HR Budgeting

You can come across common HR budgeting challenges such as:

• Lack of Visibility into Vacancies vs. Headcount Budget: As a nonprofit, you can struggle to track which positions are vacant and how these vacancies affect the overall headcount budget for both current and projected positions. The results can include underfunding, overspending, difficulty in workforce planning, and even poor donor relations. 

• Grants Not Covering Full Staff Costs: Most grants do not cover HR costs in full, especially for operational and administrative roles. When this happens, you may struggle to fairly compensate your workers, which can result in high turnover or difficulty attracting and retaining qualified personnel. 

• Staff Shared Across Programs or Departments: Staff costs are often split between different nonprofit expense categories. It's difficult to accurately allocate costs for staff who work across multiple departments or programs, especially when funding is restricted or marked for specific projects. You may struggle to track time and determine the portion of a staff member’s salary that should be allocated from each restricted fund, which can lead to potential compliance issues. 

The good news is that you can overcome these problems with the right nonprofit budgeting software and strategies. For example, you can use a clear time-tracking system and nonprofit financial management software that can handle complex allocation scenarios. 

HR Budgeting Best Practices

Besides using dedicated financial management software, here are some best practices to follow in HR budgeting. 

• Monthly or Quarterly HR Budget Reviews: Review your actual headcount vs. HR budget monthly or quarterly to avoid underfunding, overspending, and damaged relationships with donors or grantors. 

• Use Historical Data to Guide New Planning: Rely on past HR budgets and financial data to inform your current and future budget planning. Analyze past spending patterns, identify trends in key components, and adjust figures based on anticipated changes. 

• Plan for Different Hiring or Attrition Scenarios: Create multiple budget models for various hiring or attrition scenarios, calculating the projected effect on your HR budget for each scenario. By preparing for different scenarios, you can better withstand unexpected changes in staffing levels or funding. 

• Encourage Cross-Functional Collaboration: Bring together HR managers, finance leads, and program managers to promote ownership, transparency, and alignment with the mission. You'll get a more realistic budget that supports your overall goals, including a deeper understanding of program needs and their impact on the HR budget. 

Frequently Asked Questions (FAQs)

Let's wrap up with common questions regarding HR budget planning.

What Is the Average HR Budget as a Percentage of Revenue?

There's no specific or standard percentage of revenue that goes to the HR budget in nonprofits. HR budgets vary widely based on an organization's mission, funding model, and operational structure. 

According to CharityWatch, a nonprofit is highly efficient if it dedicates 75% or more of its revenue to programs, meaning 25% or less goes to overall overhead expenses, which include human resource costs. 

What Metrics Should You Track in HR Budget Planning?

You can track HR budget planning metrics such as headcount, turnover and retention, compensation, employee engagement, recruitment expenses, learning and development costs, and employee diversity. 

How Often Should You Update Your HR Budget?

You can update your HR budget annually as part of the overall budgeting process, but monthly or quarterly updates suffice if significant changes occur in your workforce. 

Regularly monitoring and adjusting helps ensure the budget remains accurate and reflects the current needs of the HR department. 

What’s the Best Time of Year to Start Planning the HR Budget?

The best time to start planning your HR budget is 3-6 months before the start of the new fiscal year. You'll have enough time to review the current year's budget and align HR needs with your overall strategic and financial plans. 

Conclusion

Strategic HR budget planning goes beyond costs to help you build a strong, sustainable, and mission-driven team. The process can be difficult because HR budgets are often split across multiple programs, departments, and functions. 

With the right tools, you can enjoy accurate, collaborative, and grant-compliant budgeting. 

Martus can help you streamline HR budgeting by helping you develop detailed personnel budgets for both employees and contractors. 

You can even post your HR budget totals to your collaborative budget worksheets, including forecast budgets for unfilled positions. 

Schedule a demo today to learn more about our transformative nonprofit budgeting solutions.