Annual payroll budgeting focuses on manpower It tells you what staffing you need to help your company accomplish your desired objectives in the next 12 months and whether you have the money to accommodate them.
Before the budgeting process, an organisation should have collected various kinds of data. From an HR perspective, the data needed to create a new budget include the following:
- Benefits cost increases or projections.
- Salary cost increases or projections.
- Projected turnover rate.
- Actual costs incurred in the current year.
- New benefits/programs planned.
- Other policy, business strategy, law, or regulation changes may impact costs.
For a successful budgeting cycle, here’s how to create a payroll budget
How to Create a Payroll Budget
1. Review Your Current Payroll
Before creating a payroll budget, you must be clear on who you pay. This is important since some employees, like contract staff, can fall through the cracks.
Also, make sure to classify contract staff separately from your salaried employees. You do not pay them the same way, and it is easy to mix them up and apply bonuses and benefits to contract staff who traditionally do not qualify for these perks.
2. List Employee Base Salaries
Next, you will need to note the pay rate for each staff member and the number of hours they work each month. Then, use these figures to calculate their projected monthly and annual incomes.
When calculating a base wage, there are a few variables that must be considered for the next year. They are:
- Pay increases or Raises.
- New hires or Additional staff. (As required).
- Foreseeable terminations, e.g., retiring employees
3. Revenue Projections, Expenses, and Cash Flow:
Project income projections might not be that simple for a large company. But forecasting your income and tracking your sales for the upcoming year is not as impossible as you think. Suppose a company is not certain what its annual revenue will be for the following year. In that case, most experts suggest projecting three scenarios: the most likely projection, the best-case projection, and the worst-case projection. It would take more time to project three different scenarios, but it allows the company to more readily as revenue goes up or comes down.
Once the income is projected, calculate estimated costs for the upcoming year. The most accessible place to start is with fixed expenses. For example, if you plan to expand, include the cost of the expansion. Some expenses to account for are:
- Training programs.
- Raises and salaries.
- Computer and office equipment.
- Employee compensation programs.
Enlist the aid of departmental leaders because they can offer great insight into costs. Make sure to communicate your actual required cost, not a wish list.
Cash flow is essentially the compilation of projected revenue with expected expenses captured.
This gives an idea of when the organisation may experience a lean month and which seasons will see a financial surplus. With such data, you can devise a plan to see you through the projected lean months by saving a surplus from other months.
4. Estimate Bonuses and Commissions
There are different types of bonuses you may need to factor in depending on company policy. Performance-based bonuses or commissions are challenging to estimate as they are not guaranteed. The best thing you can do here is to create an average based on an employee’s performance in previous years, or what employees in a particular role have achieved.
You will need to buff up on different bonuses your company offers to ensure you do not miss anything off the budget.
5. Project Employee Benefits
Mandatory benefits must be included in the budget. So be sure to keep an eye out for regulations and stay compliant.
There are also several voluntary benefits you may need to consider depending on the company. These include:
- Group Life insurance
- HMO
- 50% paid maternity Leave
- Paid annual leave
6. Calculate Payroll Taxes
Employers must pay federal payroll taxes; meanwhile other state or local payroll taxes may also apply.
Income tax, Withholding Tax, social security, Medicare taxes, and NSITF must be held from employee’s wages every month and must be paid to the relevant authorities.
Employers must ensure to pay payroll taxes (that do not come from employee wages), corporate tax including HMO, and Group Assurance contributions. Tax rates are subject to change so the company should ensure it stays up to date.
7. Total Your Payroll Budget
An organisation may have a particular way of displaying its totals. For example, it may be using a budgeting tool, payroll software, or a combination of the two that will do the calculations and provide a report. Or a spreadsheet, perhaps based on a template.
Either way, there needs to be a breakdown of the different expense totals so the right people can utilise the information to make intelligent business decisions. As well as the overall total, including sums for gross wages, overtime, benefits, bonuses, and taxes.
You may want to add a percentage for unexpected expenses when you have the totals. For instance, there may be an unexpected termination, as we have seen recent disruption due to global events.
8. Track Payroll Expenses
You must track your payroll expenses throughout the year and compare them to your projections. It will help the organisation stay within its limits when considering bonuses, overtime, etc.
Naturally, there are many reasons to monitor and keep payroll records. One example is when there is a need to audit. In such an instance, those records will help you compute the payroll budget for next year.
One easy way to keep payroll records is to leverage payroll software specialised for such function It tracks each individual’s hours, time off, and wages, and automatically saves all the records for you in one place.
In summary, an organisation may wish to create a documented payroll strategy based on the budget. For example, setting a financial goal (an increase or decrease) for the budget for the coming year.
Also, they should ensure any changes to payroll expenses are sustainable and would not have an adverse outcome elsewhere.
For instance, taking away an annual holiday bonus that employees are used to could severely affect morale.
Take contract staff out of the payroll budget. They do not carry the exact financial requirements as other salaried staff.