Basic needs are considered essential for survival. When we talk about business, the basic elements required to run a business are people resources, materials and machines depending upon the nature of business. While working on a basic need, cost is considered as a major factor. We all like saving of time and money at all levels whether in personal life or in business circumstances. The purpose of business entity is the profitable manufacturing and/or supply of goods and services to fulfill economic necessities ensuring satisfactory returns to all stakeholders mainly known as economic and social suppliers, that is,. investors/owners, members/employees of the enterprises, customers, and the society. Hence planning and budgets are developed in business enterprises to analyse and evaluate managerial decision making on account of spending and output achievement. 

 

Human Resources Management, in the process of effective utilisation of the people resources towards achievement of overall organisational goals; performs number of functions broadly named as:

1. Organisational Planning in support of determining its need, structure and relationship strategies.
2. Staffing covering headcount planning, recruitment, selection and placement, job designs and profiling, orientation and separations. 
3. Skills Enhancement comprising of training need analysis, training activities and evaluation of programme offered.
4. Compensation & Benefit processing job evaluation, designing and operating suitable salary package/ structure and variable pay package.
5. Motivation starting from performance appraisal moving through recognition to financial and nonfinancial incentives.
6. Employee Relations beginning from discipline, counseling, grievance handling moving through recreation and welfare activities, eligibilities (leave, provident fund, gratuity etc) medical services to collective bargaining etc
7. Personnel record comprising personal information gathering, database development, talent inventory etc making complete employee record.

Therefore, the cost of human capital represents one of the largest operating expenses into any business. It impacts financial results indirectly in the form of recruitment, motivation and morale, skills enhancement etc impacting quality of operations that supports building customers’ confidence leading to customer retention resulting into revenue/profit. Developing effective human resources budgeting strategies leverages organisations to improve accuracy in cost prediction, control mechanism over budget and realising significant savings. HR budgeting brings together data from different sources, for example, HRIS (Human Resources Information System), Payroll, Performance Management, Sales forecast etc and generates full picture of current and future business positioning. The HR budget is operating budget within the organisation.

Budgeting involves information and data to enable finance project organisation’s overall objectives and profitability. The finance unit of an enterprise determines budget structure element and HR unit generates elements of people cost. There are mainly two methods that are applied in budgeting: a. Generic incremental method: Using current budget, next budget is developed through adjustments on each item in close consideration of expected business move, market inflation, consumer/customer sentiments, past success rate etc. b. Zero-based budgeting method: The process begins with zero as base and each item included in the budget is justified before inclusion. It is an organised approach to decide the funding level and performance level in the context of scarce resources and new priorities from scratch – as if no operations exist (before). Whilst creating human resources budget, absolute necessary attention is expected on income of the business moving to investment on people resources. Line items of expenditure are defined by object classes, that is, charts of accounts. While talking of HR budget, such line items include: • Headcount plan, that is, Number of employee projected (includes organisation structure) • Changes projections in compensation and benefits (inclusive of overtime payments) • New benefits/programmes planned • Assumptions around employee turnover • Assumptions/guidelines for realistic expense level • Social security for employees and corporate citizenship programmes • Other changes in policy, business strategy, law or regulation that may impact costs • Skills e n h a n c e m e n t / p e o p l e development/training cost, and • Cost control and reduction via consulting, savings from compensation, benefits, turnover reduction, developed internal trainers etc Projections are based on actual costs incurred in the past or guesses, depending on the nature of the expense and the data available.

It may be difficult to project in the circumstances of significant fluctuations in turnover and staffing needs. Thus HR associates need to gather every source of available data in order to make educated projections. It would also be wise to obtain feedback on essential HR moves from other functional heads that ensures buy-in of projections in view of instilling confidence on the inclusion of their expectations from HR. These are crucial in working out lowcost benefits contributing to increased employee satisfaction. With the shift from traditional to professional working of HR, clearly defined mission, vision and values for HR function becomes a path finder for people managers in streamlining process and securing alignment of total team towards one direction. Currently, HR function in any organisation is evaluated on the basis of people productivity and hence it is widely suggested to work around productivity improvement, product/ service quality delivery and instilling customer satisfaction that undoubtedly secures customer retention and contributes to sales growth with improved profitability. This enables HR to track revenue and profit per employee, that is, a comparative study of employees output against expenses per employee. Analytical Budgeting provides opportunity to HR practitioners around comparing achievements with competition and one’s own past performance that opens the door for continuous improvement.

The essence here lies in successful measurements of HR functions assignments and performance as it has a direct impact on the organisation as a whole. The recent studies and human scientists have directed a need to establish a clear numerical relationship between people management and financial performance as it would support translation of strategy into operations, managing and controlling overall performance down to business transactions as a result of improved decision making across the organisation. From an entrepreneur’s view point, employee shares of the rewards of production whether cash or other form of earning are commonly referred to HR expenditure and considered as “Cost”. HR practitioners need to identify the areas of businesses that are growing and work with responsibility centres in such areas.

Volunteer themselves around HR support in elimination of barriers experienced by such areas of business in improving productivity and margin. Also establish review process to evaluate impact of HR interventions and once positive impact is visible (which is sure to happen), the business head becomes the HR advocate with the Finance head that ensures full considerations and funding HR initiatives. HR strategies are never stagnant, it is most flexible and shifts focus with changes experienced whether economic or otherwise.

Therefore, it would be wise for HR function to prioritise their programmes and services focusing most important areas that have high and visible impact on people productivity as well as producing immediate return to make sure that their budget is accepted as value addition instead of cost. It needs to shift its focus to growth areas that can be served with prioritised HR services. This will improve response time and customer service in total too that will be added advantage for HR to be perceived as responsive productive unit and eradicate the common perception of unresponsive overhead unit within the organisation. To conclude, HR needs to demonstrate competitive advantage for the business in total from the programmes and approaches adopted for budgeting defining difference in ways and means for achievement that confirms result much superior than ever before so that confidence of total business is secured to maintain HR programmes.

(Dr Karna is the Executive Chairman of MARK Business Solutions Pvt Ltd and Ad Abhyas Marketing & Communications Pvt Ltd. The article is based on various research reports and his practical experiences as management practitioner.)