More HR Budgeting

Well, I had several people ask additional questions about real budgeting for Human Resources. I’ll try to expand a bit on my earlier post…

First, a microscopic finance lesson: Gross Profit is the total revenue or sales, less the cost of generating that revenue (COS or COGS). It tells you how much money a company would make if it didn’t have other costs, such as most salaries, taxes, interest, etc., normally referred to as Operating Expenses and typically including S, G, & A.

Operating Expenses are those incurred by the business that are not directly related to revenue production, such as most utilities, salaries, office supplies, etc. Operating Expenses do not typically change significantly when the organization’s level of production rises or falls — they aren’t usually “variable.” Sometimes referred to as “overhead,” “fixed,” or “indirect” costs.

Here endeth the finance lesson…

Though HR expenses are typically an Operating Expense, direct value-add from Human Resources comes from Gross Margin contribution — increasing revenue or decreasing the direct costs to produce that revenue. Cost-reduction strategies are usually outside of Gross-Profit, and can also have a significant influence on earnings. Assuming a company delivers 10% to the earnings or EBITDA line, it would take $10 of additional revenue to deliver earnings equal to your saving a dollar in Operating Expense, so don’t throw away those last few Post-It Notes.

The real “meat” of strategic Human Resources, however, comes from a significant contribution to the Gross-Profit line through various methods. We’ll discuss those in-depth in later posts.



Kevin Berchelmann

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