Budget payroll expenses the same as you would other costs

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by Stephen Hawley Martin

Wouldn’t it make a lot of sense to budget for payroll based on the amount of work anticipated? Most often this is not done because data required to do an accurate job simply have not been available. This no longer has to be the case, given what can now be gleaned from sophisticated time, attendance and work-force technology systems.

Assuming someone has gone to the trouble to forecast what the company can reasonably expect in terms of sales, it’s not difficult to determine how much labor and staff time will be required for those sales based on historical data.

Bill Monahan, a top executive at St. Paul, Minn.-based 3M, was put in charge of a newly formed company that included six business units that had been spun off from 3M. During the first reports from unit leaders, Monahan says he probably believed 50 to 75 percent of what he heard. He did not examine the details of the plans they presented as aggressively as he should have, he admits in his book, “Billion Dollar Turnaround.”

Monahan believes he should have started by believing nothing and requiring each business unit leader to prove every aspect of his or her plan. As I’m sure you know, this is called zero-base budgeting. In other words, the business unit leaders should have been instructed to work budgets up from zero revenue rather than adjusting from the other direction, which, he says, often includes unrealistic growth projections.

Not doing this set him back a year, Monahan predicts. Executives who have come out of GE say the company does a good job at requiring business leaders to use zero budgeting. As Monahan moved forward, older and wiser, he used companies like GE as benchmarks.

Monahan landed that job in 1996 before work-force management technology had been developed to the level it’s at today. If he’d had the proper labor data back then, he would have had a clear picture of labor costs.  Labor to output, sales and inventory data would have snapped things into focus. Instead, looking at each operation was more like gazing into a muddy pool. And if today’s technology had been in place, the leaders of those units would have found it much easier to build a budget from the ground up.

My experience is that too many companies continue to stick a wet finger in the air to determine how much to budget for payroll for the coming year. In firms that are guilty of this, management typically determines the cost of running the business for the ending year, calculates the inflation rate or annual revenue growth, and budgets an increase of 2 percent, 3 percent, 10 percent, or whatever the case may be for the upcoming year.

You might say payroll budgeting is done in much the same way that profit sharing is determined. This amount is then divvied out to department heads. The department heads in turn take a subjective look at staff and try to figure how much it will take to keep each person happy. The entire salary budget is often allocated among the staff as an annual or hourly base rate increase. Often, no margin for staffing changes, overtime or incentives is set aside. The budget is merely a bonus payment spread out over time. This is hardly the way to plan labor expenditures.

Think about this. If the purchasing department decided on New Year’s Day that it was going to pay each vendor a set amount on a weekly basis for the rest of the year, the company would be turning itself on autopilot –– unable to react to any turbulence or headwind and unable to avoid catastrophe or to seize opportunities for improvement. Management would have the heads of those responsible in purchasing. Why should those in charge of labor utilization and salary budgets be treated any differently?

Stephen Hawley Martin is a former principal of The Martin Agency in Richmond and author of more than a half dozen books including his newest, Lead Enterprise Leader: How to Get Things Done Without Doing It All Yourself.

He is editor and publisher of The Oaklea Press, a book publishing business dedicated primarily to helping business executives increase productivity. He can be reached at .(JavaScript must be enabled to view this email address)

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