Payroll Budget Creation: The Importance and a Step-by-Step Guide

Developing a payroll budget is essential for organisations to keep track of their entire human resource expenditures and conduct their operations efficiently.

Payroll budgets are used by businesses to forecast salary expenses for the coming year. These budgets also take into consideration associated expenses such federal payroll taxes, employee benefits, and overtime.

As a consequence, a precise and accurate payroll budget will aid a company in monitoring expenditures and making crucial business decisions.

Creating this budget, on the other hand, may be a time-consuming and hard process. There is a lot to consider when creating a payroll budget, so we’ll break it down into easy, doable phases for you.

Why is Creating a Payroll Budget Worth It

A business’s payroll budget is a small, but important part of its overall operating budget. When your business operates using a payroll budget, it’s easier to maintain a specific payroll percentage and reduce overspending.

The benefits of creating a payroll budget for your business include:

  1. Supporting Financial Stability: Maintaining and following a payroll budget can help your business avoid overspending on payroll and taking funds away from other essential operating areas.
  2. A proper payroll budget helps prevent Insolvency:The most fundamental goal is to guarantee that cash is accessible when payroll runs are needed. A typical definition of insolvency is when a corporation is unable to pay its employees, hence this condition should be avoided.
  3. Supporting Compliance: Accounting for payroll taxes within your payroll budget can help your business allocate and maintain enough funds to cover any payroll tax liabilities.
  4. Data-Backed Hiring Decisions: Knowing how much you have within your payroll budget can influence hiring decisions, such as offered benefits, salary ranges, and raises.
  5. Occupational benefits: A competitive employer is one that offers perks to employers, such as additional pension contributions, sick pay schemes, and more. A payroll budget lets you check the cost of schemes such as these against the available budget.

 

How Much of Your Budget Should Go To Payroll?

Before we go into the step by step guide on how to create a payroll budget, let’s take  a look at how much of your company’s money should go into payroll.

There is no universal payroll proportion that works for every company. However, the benchmark for payroll expenses is generally 20-30% of the company’s gross revenue. However, some industries, such as the service and hospitality industries, may have a payroll budget of 50% that doesn’t diminish profits.

To establish how much of your business’s budget should go to payroll, you’ll need to do a thorough analysis of your overall budget.

If you’re wondering about how much of your company’s budget is now dedicated to payroll, apply the following method to get your payroll percentage:

Payroll Percentage = (Total Payroll Expenses)/(Gross Revenue) x 100

For example, a company with $1,000,000 gross revenue and $300,000 in payroll expenditures spends 30% of its gross revenue on payroll.

After determining your payroll Percentage, you may assess if it is too high or too low depending on your desired profit margins and staffing requirements.

A 6-Step Guide to Creating a Payroll Budget

To develop a payroll budget, you must collect the necessary data and make numerous major estimates.

The truth is that there are several aspects that must be considered. However, after you’ve determined all of the elements that must be included in the payroll budget (this we will discuss later), you’ll be certain to get it properly.

Step 1 – List All Employees with Their Roles

Make a list of everyone who is paid by the firm. This comprises all roles, including those that are remote or temporary, as well as those that work on-site.

Remember to include yourself on the list. Also, keep in mind that you may want to keep contract workers separate because your calculations for them will be different because you will not be paying taxes or benefits to them.

Unless you’re a start-up, you won’t have to create this list from scratch. Hopefully, you have extensive employment records and it’s only a matter of compiling the data.

Step 2 – Examine Your Current Payroll

Before you can design a payroll budget, you must first determine who you will pay. This is significant because some personnel, such as temporary workers, may fall through the cracks.

Also, be careful to segregate independent contractors from salaried staff. You don’t pay them in the same manner, and it’s simple to mix them up and apply incentives and benefits to independent contractors who don’t normally qualify.

Step 3 – List Each Position’s Payroll Expenses.

Examine last year’s numbers, totaling the costs in a spreadsheet such as Excel or Google Sheets. Estimate yearly compensation for each position, taking increases and bonuses into account. If you are developing a new position for which you do not have data, consult your local employment agency  for typical salaries in your region or salaries provided by your rivals.

When estimating, strive to be conservative and budget more than you think you’ll need. When considering bonuses and pay hikes, separate those figures from normal earnings so you can examine them for individual people and as a group.

Step 4 – Sum up Each Expense Category

Now that you’ve entered all of the data into the spreadsheet or application, you can see your totals for each month and the whole year. You must be able to see entire payroll expenses for each position and category, including gross compensation, taxes, and benefits.

Examine the totals for each month as well as the annual total to determine that they are fair.

Step 5 –Run a Budget Review

Now that you have the figures, double-check that they are reasonable. Make charts or graphs to better comprehend the data flow. Pivot charts may assist you in delving into data by swiftly restructuring it in a way that best answers your queries.

Comparing the payroll budget to projected earnings is a good place to know if you can afford new hires. If there’s room in the budget for this, it’s a huge plus as new hires can aid business growth.

Step 6 – Track Payroll Expenses

You must track your actual payroll expenses throughout the year and compare them to your projections. It’ll help your company stay within its limits when considering bonuses, overtime, and so on. Naturally, there are many further reasons to monitor and keep records of payroll. For example, if there needs to be an audit.

If you handle your business payroll yourself, it can be challenging to track the numbers closely, especially if you have many employees. The right payroll service provider can help you track your payroll budget easily so that you can spend your time identifying insights and using them to run your business effectively.

Items To Be Included in Payroll Budget Include:

  • Wages: How much you pay employees is the basis for all other items included in a payroll budget.
  • Commissions and bonuses: Any extra payments employers pay employees, except for reimbursements or tips paid directly by customers, are included in a payroll budget.
  • Payroll taxes: While employee income taxes are composed mainly of withholdings from employees’ paychecks, the employer’s share of payroll taxes (FICA) is still included in an overall budget.
  • Health insurance benefit premiums: If an employee elects to receive employer-sponsored health insurance and the company pays for all or part of those benefits, that cost is a payroll budget item.
  • Company contributions to employee retirement accounts: Any employer matching, profit-sharing or other contributions into employee savings or employee retirement plans are part of a payroll budget.

The 3 Biggest Hurdles to Creating a Payroll Budget and How to Overcome Them

Creating a payroll budget is not the simplest task. But it’s a work well worth your time and effort. Here are three frequent budgeting difficulties that users confront, as well as suggestions to assist you prevent them:

#1. Taking Time Off into Account

To minimise mistakes while managing payroll, it is critical to account for paid time off or sick days. However, the fact that payroll is already difficult and may be delayed due to holidays or illness can quickly compound matters.

To avoid this, you must have all of your workers’ work hours scheduled at least three days in advance. If a paycheck is going to be late, notify the employees as soon as possible to minimise any confusion.

#2. Employee Misclassification

When it comes to payroll, misclassifying employees may be a headache. Many businesses are unaware that not everyone who works for them is an employee; they might be freelancers or contractors. These organisations have various regulations guiding their payroll.

If your company hires freelancers, temporary workers, or contractors, be sure they are not listed as employees on your payroll. They will not be entitled for the same benefits as your genuine workers, nor will you be required to retain a portion of their earnings for tax purposes. To prevent incurring extra fines, double-check all of your stated roles and confirm they are accurately categorised.

#3.Retaining Confidentiality

All payroll records must be preserved, handled confidentially, and stored in a secure location. While this may appear to be a straightforward task, in this day and age, data and privacy issues are growing.

You should not release any personal employee information without their consent, unless you are required to do so by a court order or a government obligation.

Final Tip

With a payroll budget on hand, you are well-positioned to make projections for the future. Creating a budget is only half the fight when it comes to financial management. The other half of the struggle is adhering to your payroll budget. The easiest method to keep to your payroll budget is to find a fine balance between rigidity and flexibility.

You want to be as conservative as possible about sticking to your payroll budget, but you also want to be adaptive enough to deal with any unforeseen changes. That is why having a budget buffer or cushion is so important; the buffer allows you to roll with the punches without breaking the bank.

Using the services of an external payroll service provider – Talent PEO Africa – who can help you manage your payroll, anticipate your spending, and handle your employees’ other requirements, such as benefit administration, is one of the best methods to create and keep to your payroll budget.

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Hybrid work model

A GUIDE TO HYBRID WORK MODEL

“A survey conducted with Wakefield Research shows that almost half of employees (47%) would likely look for another job if their employer doesn’t offer a flexible (hybrid) working model” 

Hybrid Work Model - Talent PEO Africa
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Long before the pandemic, people were shifting toward remote and hybrid work model, but like with so many other things, COVID-19 hastened the process. And with large firms like Nationwide, Citigroup, Ford Motor Company, IBM, General Motors Co. all choosing to combine the benefits of in-office and remote working, the hybrid work model has emerged as the preeminent return-to-work strategy. 

What Is Hybrid Work Model

Hybrid work is a flexible work model that supports a blend of in-house, remote, and on-the-go workers. It offers employees the autonomy to choose to work wherever and however they are most productive.

It is a people-first approach to workforce management that boosts productivity and job satisfaction. With hybrid work, the workplace is no longer inside the four walls of the corporate office—it’s an ecosystem of employees working from home, in co-working spaces, and in the office. Team members can migrate between various locations depending on the work they need to get done.

However, the hybrid workplace is not a simple formula or a panacea for all workplace challenges. Today’s hybrid workplace must be implemented strategically, taking advantage of modern HR technologies that engender connection, collaboration, and employee engagement. 

Hybrid work model
In this article we will cover the advantages of hybrid work models, 4 different types of hybrid work models, challenges, and best practices for implementing these models. 

Advantages Of Hybrid Working

  • Better work-life balance: 

According to Slack, work flexibility is a key reason why employees are attracted to the hybrid work model. Greater flexibility and autonomy increase job satisfaction and happiness, which improves performance at work as well as overall employee well-being. An integrated focus on work-life balance helps create a successful hybrid workplace.

  • Reduced operating costs:

Companies that adopt a hybrid work model can reduce their operating expenses because they don’t have to buy or lease as much office space. Employees also benefit because they spend less money on transportation.

  • Hire talent across the globe

Do you want to expand your talent pool? Your company can hire talent from all over the world using a hybrid work model. You can hire people with specialized skills if you have access to a larger talent pool. This can provide your company with a competitive advantage, assist you in entering new markets, and ensure continuous productivity.

  • Work when and how you’re most productive 

Employees in a mixed work environment have more freedom to complete tasks and are most productive. For instance, some people do better in the evening while others function best early in the morning. 

There is also a potential for reduced absenteeism, since employees suffering from minor illnesses may prefer working from home instead of taking a sick day. This also lessens the possibility of spreading germs to colleagues.

  • Reduced attrition: 

Employee engagement is generally higher among those who value the flexibility a hybrid work model provides, and they are less likely to become burned out or look for other employment opportunities. In contrast, when companies force workers to stay on-site all the time, they are less engaged, suffer from greater levels of burnout, are more likely to look for opportunities at other companies, and have lower levels of wellbeing.

Types Of Hybrid Work Model

Types of Hybrid work model

LinkedIn surveys have shown that over 56% of workers prefer a mix of in-person and remote work. But before you make your transition, it’s crucial to consider the different types of hybrid work models. The following are 4 types of:

  1. Working in Shifts

The truth is that most office leaders want their employees in the office. As a matter of fact, up to 50% of all employers want their company to come in-person to work every weekday. However, this is not a widely held belief among employees. As a result, for some concerned leaders, the hybrid approach of working in shifts may be the solution. 

A set number of employees alternate between working remotely and onsite . The employer usually decides who works where and when, by creating a schedule.. Leaders must cultivate communication channels to cater to this rather agile approach for this type of work to be efficient. Nothing is lost in translation between shifts this way.

  1. Office-first Hybrid

The office-first hybrid, as the name implies, prioritizes in-office attendance. This means that employees are expected to come into the office for the majority of their workdays. Meanwhile, remote work days are either a few days per week or spread out over the course of the month. Organizations that value physical collaboration, such as construction or manufacturing, often benefit the most from this type of hybrid model. 

The  disadvantage of this approach is that employees may choose to work remotely on the same day This can jeopardize critical in-office operations. To address this, office managers must plan ahead of time Employees can then use their legally earned remote days without interfering with that day’s productivity

  1.  Remote-first hybrid work model

Employees work remotely most of the time with occasional visits to co-working spaces or the office for team building, collaboration, and training. This Is favorable for  employees who prefer working remotely. Currently, employees with this sentiment make up approximately 60% of the workforce. In this model, the company may not have an office space and instead relies on team members in the same area to get together when they see fit. Twitter adopted this remote-first model and will allow all employees to work from home.

  1. Hybrid Flexible

The hybrid flexible approach places the workforce in control. Employees can choose which days they work remotely and in-person using this approach. While this method allows employees to exercise their autonomy, there is a risk that some goals will be missed. To avoid the latter, employers should provide hybrid work benefits for employees, such as subsidized home office equipment and a remote work allowance. 

Employees can benefit from a home workspace that allows them to be productive during work hours. Offering this hybrid type with this benefit also helps to attract new talent, which is critical in the ongoing Great Resignation.

Challenges Of Managing An Hybrid Team

A hybrid team presents new opportunities for the modern workplace, but they present new challenges as well. Understanding the most common challenges associated with the hybrid workplace model will help your organization get the best out of it more favorable for your employees; 

The following are some of the common challenges; 

  • Developing the right hybrid model: 

Because there are so few well-known hybrid workplace models to adopt, each organization must create a model unique to their requirements. The optimum match for each company’s particular environment and culture may require iterating this strategy as various combinations and technologies are tried and tested.

  • Keeping processes consistent across team members

When managing a hybrid team, give your employees some level of autonomy and flexibility in their job. Some team members thrive with such freedom. Others miss the structure and consistency of working together in person, where processes are often more established.

Without setting clear expectations or creating proper guidelines for your hybrid team, it will be difficult to measure, guide, or enhance team members’ performance.

Establishing new norms for how your hybrid team operates also requires you to rethink your own.

  • Communication

It’s obvious that reliance on technology creates basic communication challenges. In addition to the technological challenges, communication in remote and hybrid teams can be complicated by the fact that some people are more comfortable speaking up over screens than others—and that’s in addition to the power, status, and language differences that already create barriers to communication in work settings. This will require stellar communication skills on both ends and a commitment to check-in on team members.

  • Connection

The difficulties of connection are not limited to issues of technological communication and logistical coordination. There’s also the issue of social connections, and how they can be jeopardized or lost entirely when working remotely.

to produceHybrid working runs the potential of producing two classes of people: a “dominant class” of people who feel deeply linked to the company and at its center, and an “underclass” of people who feel disengaged from both the work and the social life that gives it meaning and ties its employees to it. As a result, workers may be less content and devoted and more prone to look for work elsewhere.

Team managers will have to do extra work of bringing the team together and connected, through team bonding, team building, team meetings etc.

  • Maintaining a cohesive company culture

Some employees may find it hard to get a feel for their work culture because they work remotely. As time goes by, they may even forget what their organization stands for and what they are working towards. This can be solved by constantly reminding the team about what the company stands for.

Hybrid Model Best Practices

  1. Involve employees in the hybrid work model development: Organizations often start developing their hybrid work models in discussions about policy, such as how many days per week employees are expected to work on site, and rules about being accessible while  working remotely. Involving employees in this discussion will give them an inclusive value and their full cooperation.

Pro Tip: Creating a cross-functional workplace council with employee representatives is a good idea. You will have a variety of staff viewpoints this way when making judgments on things like the best method to move forward with scheduling.

  1. Invest in cybersecurity:  Hybrid work provides a broader attack surface for cyber criminals to exploit. More devices accessing company servers from more locations means even more vulnerabilities to monitor and manage on a daily basis.

The key ingredient to creating a successful and cyber-secure hybrid workforce is having a good company culture. Invest in training to build awareness of cyber threats among all employees to make them proactive security partners. Clarify what risks exist, what the consequences of a breach are, and why certain measures are  put in place.

Training is especially important to help staff identify social engineering attacks before falling victim to them, and to make all employees responsible for their online behavior and conduct – both in the office and remotely.

  1. Accept that hybrid work requires more coordination: One of the most difficult aspects of hybrid work is that it necessitates more coordination between managers and employees. This entails taking the time to coordinate when people can and should be available to collaborate; determining which types of collaboration sessions should be conducted in person; and discussing what type of collaboration sessions can be done in a hybrid or all remote environment.
  1. Gather employee feedback on a regular basis:

Paying attention  to your employees is critical to the success of hybrid work. Maintain an open line of communication with your employees as you implement  changes to the workplace that will ultimately affect their daily work lives. Ideally, the changes you implement will benefit both your organization and its employees.

  1. Be fair with employees who must work on site 

Flexible programs can create feelings of unfairness and it can lead to friction between your on-site employees and your remote employees. If they’re required to be on site, perhaps they should get something [like] an on-site bonus or something that other people don’t.

Conclusion

People make up an organization. Adopting a hybrid or an entirely remote work style has no bearing on this core idea. If anything, distribution, if anything, supports that argument because it forces leaders to continuously be innovative in their approach to collaboration, evaluation, and motivation.

A precise plan and strategy are necessary for a successful hybrid approach. Then companies will see significant returns on their investment with the appropriate leadership and resources. Recruiting and managing a remote team doesn’t have to be your responsibility. Contact us at info@talentpeo.com to get the responsibility off your shoulders.

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