I've spent the last several years of my career training and preparing newly minted recruitment leaders to take on the immense responsibility of leading a department or team. Often they are stellar performers and experts in talent acquisition who have demonstrated readiness to take their team and organization to the next level. Yet the one common theme? They are all anxiety stricken over the thought of now planning and managing a department budget. As a young manager years ago, I experienced the same. Sure I knew finances mattered, but why did I have to be involved, let alone be responsible (gasp!) for how we spent money?!
Seems silly now. In retrospect, I realize my denial had everything to do with a lack of confidence and training. I simply wasn't equipped with the tools, or any guidance really, to understand what I was looking at. General ledgers, SG&A, gross profit margins, EBITDA....what did it all even mean to my team?
While taking any kind of course or webinar is always a great idea, there are very few resources out there that help Talent Acquisition leaders specifically understand how to connect the dots to the business strategy and new hire deliverables through a cost conscious lens. But have no fear! I created this guide to cover some of the basic concepts to help you acclimate to the wonderful world of talent acquisition budget planning. The content here is a diluted version of all the ins and outs, and it focuses on the planning and control of operating expenses (OpEx). However, managers should also become familiar with the general difference and implications of capital expenses (CapEx). An article published by Investopedia does a nice job of translating the difference here. As you gain more experience living through a budget cycle or two, it will feel less and less like a foreign language and you'll be regarded as not just the TA expert, but a well-rounded business professional in no time!
Step 1: Understand where and when the business needs recruitment to deliver
In technical terms, this is called workforce planning, and it is typically modeled for the upcoming year. This is likely a term you're already familiar with, and may be even assisted with guiding the organization in planning at some point without even realizing it. The key is to first understand how many hires your team will need to supply in order to meet business objectives. Start by identifying the company's historical trend of attrition. Attrition is calculated by dividing the average number of employees leaving, typically in a year, by the total average employees in the same timeframe, and multiplying by 100. Here's a great resource from Continu loaded with a helpful explanations (and why people leave), but if you're a visual person like me, I've pulled out the attrition calculation here:
Now what about growth plans? Does your company plan to merge, acquire or grow by way of de novo in new markets? If you will grow via M&A, consider adding a greater level of projected turnover for those newly acquired employees as studies show increases in separations after joining through an acquisition before trailing off to resemble more closely what you would expect.
What about geography? Does recruiting in certain markets require a heavy lift, more effort and cost to produce the same hires in a different more appealing or mature market? You can confirm this by comparing an average time to fill for those areas. Layer in average time to fill for reasonably projecting when you feel confident to committing the delivery of those new hires to the organization.
Seasonality? Does your company hire new grads, and which schools yield the highest percent of graduates in your hiring production? When do those schools hold graduations and what is the typical size of the classes? If you have past data on the % of new grads hired from any given school, you would calculate an anticipated number of hires from that average graduating class in the month or two following their graduation.
You'll put all this data together and will begin to see the picture of the total number of hires necessary to meet the company's objectives, usually laid out by month or quarter for the upcoming year.
Be clear about assumptions in plan and overestimate forecasting spend as much as possible. Having a strong grasp of current market availability and historical average conversion ratios will help you project hiring capacities for new and existing markets where your organization plans to operate. And if you don't have historical data, start tracking for the next planning cycle.
Step 2: Build the budget to align with the resources you will need
Next build your budget based on projected hiring demand, considering also leads, interviews, and offers required to meet target hires. Overestimate and add lots of padding! Whether your company will administer budget planning with an incremental approach (using previous year’s spend to guide assumptions on future) or zero-based budgeting (starting from scratch and justifying each line), get really good at tracking your spend activity. This not only makes monthly reconciling a breeze, but it inevitably gives you a baseline for future planning.
Recruitment ratios, and more importantly, knowing which levers to pull, build economies of scale over time – meaning you should not always have to use the same correlated spend to yield the same production. Make sure you show improvements always in the recruitment funnel. That said, you’ll need to track snapshots of ratios frozen in time because they will always be changing as potential new hires people move through the recruitment process.
What about source of hire? How many leads and offers are those sources producing? What is the cost per lead & cost per application? Be clear on first touch source and secondary source of hire. Do your recruiters have a framework for classifying resources? And what is the shelf life for a source? These are important aspects to think through so that you can trust the data produced by the team. Build source classification and how it is documented into every new recruiter's onboarding. I cannot emphasize this enough - recruiter training and continual auditing of their CRM/ATS inputs will make or break the department and ultimately the business, if it's driven by talent, as most are!
Step 3: Understand the systems your company uses to track cash flow
Depending on your organization, you may need to cross reference expense reimbursements from one system, vendor invoices from a different one, and the credit card statement from another. For instance, your company may use an Enterprise Planning Resource (ERP) system, but will use Accounts Payable software (such as Beanworks, AvidXchange) to pay vendors. Additionally, understand how expense reimbursements are distributed to employees and how the company pays and reconciles credit cards for those individuals who have one.
You will make your life immensely easier if you pay special attention to ensure the correct GL codes are associated with your departments' spend. This will be a constant cycle, and if you wait until the end of the year you will have hours of work ahead of you. It is easy to procrastinate monitoring this monthly, but take it from me, I have spent too much time in the anxiety-stricken 11th hour to force myself to now stay on top of it. Don't make my mistake! The point is to pay close attention to all systems in which the company tracks spends so that you do not get hit with any reclassed surprises. You also want to communicate to Finance if an expense landed in your budget that needs reclassed to another department.
Step 4: Adapt as needed
Most companies will do a reforecast typically mid year to reset any changes to the budget or business direction that needs reassessment . Or, if you work for a start up, they may reforecast quarterly. As the department leader, you will be need to be prepared - and often will need to defend your resource allocation. Afterall, you know what your team needs to be successful. Study business trends in your industry for resource adaptations if needed (ie, turnover, new acquisitions, etc). If you are up against a cut or the company is frugal to begin with, consider where you can move money around. I once had a VP who was an expert at managing "left pocket, right pocket" movement of funds that it almost became an inside joke.
Are there other efficiency pick-ups in the recruitment funnel? Or worse, is your top-of-the-funnel activity not tracking to sufficiently meet new demand? Get ahead of the why before you are asked and present to leadership for approval or justification of a solution. If you wait until the year end or reforecast, you are too late and risk losing creditability.
Above all, data is your blueprint. Having a solid cost/hire will help to project spend, as does having a cost per lead/application. Pro tip: the latter also helps with portraying a cost savings tied to improvements in the funnel! Constantly and proactively look for opportunities to show the team’s value.
Bringing it all together
Let's look at an example. Pretend you have a hunch that hiring managers are not conducting interviews well, but you have no real data to back your thought. Begin leveraging reporting from your ATS to calculate your current Interview to Offer and Offers to Accepted ratios. Say it is 25% of all interviews that progress to an offer, and 90% of offers extended will convert to hires. Your cost per hire is $5,000. If you have 200 interviews, you know 50 of them will receive an offer, and of those 50, 45 will accept. You spent $225,000 during this same timeframe, so your cost per hire is $5,000. Propose a goal to move the conversion to a ratio that is challenging for where you are at, yet achievable, and in this case, perhaps 40% is a good goal for Interviews to Offers based on your industry research.
How will you get there?? Will recruiters take time to train hiring managers, or will you maybe bring in outside leadership training? I understand there are a multitude of reasons affecting each stage's conversion, but just focusing specifically on hiring manager's role in Interview-Offer conversions; it is indeed a big one. You have to justify any cost to move that needle in your plan.
At a 40% increase in interviews to offers, what you are actually proposing is that without any increase in sourcing costs to generate more leads, you will deliver 27 more hires out of the same hiring pipeline by increasing manager education.
200 interviews X .40 (goal)= 80 Offers
80 offers X .90 (offers to acceptance)= 72 Hires
72 hires - 45 hires (current) = 27
27 X $5,000 cost/hire = $135,000 in savings, minus cost of training
Now you have a reference point to justify cost associated with whatever actions you will take to increase the Interviews to Offer ratio, whether it is in recruiter time to deliver hiring manager training or bringing it in externally. The idea would be to initially invest in time/resources for long term scalability.
As you can see, the possibilities are endless, with enough data. And if you do not, simply build an action plan in your department goals to begin reliably collecting it for future planning! Make sure recruiters understand the impact they have on data integrity, and why it will help them in the long run. As a recruiter, I'd be pretty darn frustrated with a 25% Interview to Offer ratio, and relieved my leader was taking initiative to help correct it!
There is no doubt budget planning and management can feel daunting. Use data as your North Star. Stay in lockstep with organizational goals. Remove obstacles so your team has the tools to deliver!
And remember there is never an "end date" or finish line for your own professional improvement; we are all on a learning journey, and it starts from the top down.
You got this! 💪🏼 Now go crunch some numbers. 'Tis the season of budget planning!
