As business costs continue to be a primary concern for organizations amid an uncertain economic climate, understanding the importance and concepts of the budgeting process is more important for HR leaders than ever. However, every organization has unique processes and timelines that will impact how the budget gets created and how funds are allocated to various functions, programs, and initiatives. In response to HR leaders’ current and ongoing needs for direction on the budgeting process, McLean & Company has published its new data-backed industry guide.
The new HR Budgeting Guide will help HR leaders understand foundational budgeting concepts, identify the role of key stakeholders in the budgeting process, recognize HR’s role in organizational budgeting, identify opportunities to build HR’s role as a strategic partner, and more.
“Senior leaders’ perception of HR as a function impacts HR’s involvement in the organizational budgeting process,” says Grace Ewles, manager of HR Research and Advisory Services at McLean & Company. “Traditionally, leadership may view HR as a necessary expense rather than an opportunity to strategically invest in talent in support of organizational outcomes, such as productivity and innovation. As such, organizations that fail to identify the talent implications associated with strategic investments risk prioritizing short-term financial gains while ignoring long-term consequences.”
McLean & Company defines budgeting as “the process of planning how organizations spend their money to achieve strategic goals.” The resource further highlights three critical components of the budgeting process HR leaders must understand in order to be strategic partners, as outlined below:
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Budgeting style: This refers to the approach used to identify HR expenses and create the budget. Two examples of budgeting styles include: |
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Incremental budgeting, which involves building the budget using the previous year’s budget or final expenditures as a starting point. |
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Zero-based budgeting, which requires building the budget from scratch with no previous expenses assumed to recur. |
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Decision-making process: Involves identifying who is responsible for establishing, reviewing, and approving the budget. The decision-making process can take on several formats, such as: |
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A top-down approach, during which the budget is established by executives and the finance department before going to department leaders. |
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A bottom-up approach, in which department leaders determine the required budget to meet the department goals. The budget is then proposed to executives where it is approved, rejected, or adjusted. |
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Fund-dispersion process: This is the way in which the functions within departments receive funds. The fund-dispersion process may be: |
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Centralized, with the department budget created based on one overall budget that is then allocated to the various functions within that department. |
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Decentralized, in which each function is allocated its own budget that is then used for initiatives and projects specific to that function. |
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In addition to the three components of the budgeting process, the firm outlines two key parts to business acumen that must be considered to increase HR’s effectiveness in the budgeting process. Business acumen entails using critical thinking, a solid understanding of the business and the wider industry, and financial literacy to make decisions. The two critical components of business acumen are below:
- The knowledge of business fundamentals: Understanding key financial terms, specific organizational knowledge, and knowledge of the industry in which the organization operates.
- The application of said knowledge: Thinking critically to engage stakeholders and align HR activities with organizational priorities.
McLean & Company advises HR leaders that the budgeting process is much more complex than simply identifying costs and presents the opportunity to solidify HR’s role as a strategic organizational partner. Building a relationship based on mutual respect and understanding helps transition the finance department into an advocate for HR. The resource explains that the more that the finance department values how HR budgets are created and implemented, the more likely they are to see HR as a strategic long-term investment.
To access the full research and resource, including an overview of the introduction, development, and creation and allocation of an HR budget, download the HR Budgeting Guide.
Additional McLean & Company resources that can support HR leaders in the budgeting process include:
- HR Budgeting Workbook
- Standard Internal Communications Plan
- Training Deck: Business Acumen for HR Professionals
For more research and support, visit mcleanco.com/services and connect via LinkedIn and Twitter.
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