Preparing a Training Budget

One of the questions that has to be answered when a training plan is being put together is: 'How much will the training cost?' It is interesting to note that we are nearly always asked how much training will cost rather than what is the size of our training investment. A better question might be: 'How much would it cost us if we don't do this training?'

Whatever question is asked, and no matter what we call it, working out the figures may not be quite as simple as it first appears. This is because of the difficulty of deciding what should be included in the costs. For example, should you include the trainers' salaries, the students' salaries and the loss of production during training? You may end up doing a very detailed cost analysis or you may decide only to count what is normally deducted from your budget.

Whatever you include or exclude from your budget, the golden rule is to be consistent and to make your assumptions very clear. With all these parameters sorted out you will then be in a position to prepare a training budget.

The size of the budget is one of the main limiting factors when it comes to determining how much of the training demand will be delivered. There are many ways of preparing a budget and the way you choose will depend on your company's accounting systems. What you include or exclude from the budget depends on these practices.

You may also have to decide whether your training department should be run as a profit centre. A profit centre means that you will sell your courses and training expertise in order to defray the expense of running your own training operation. This will involve you in preparing estimates and working agreements.

The following is a list of items that can find their way into a training budget:

• cost of external courses,
• purchase and hire of equipment, books and videos,
• production of training materials,
• training staff wages/salaries,
• training staff overheads,
• hire of training venues,
• student accommodation costs,
• student travel costs,
• student wages/salaries/overheads.

Rule of thumb: Include everything that will be charged to the training department's budget during the financial year.

The aim of the exercise is to determine whether the cost of the training plan exceeds, falls below or meets your allocated budget. Most budgets also show the expected spend by month so that you will be able to monitor the budget during the year. If you are selling training to other departments you will also need to show the expected income for each month.

Be sure to find out what your company's financial year is. Some start in April, some start in November, while others are the same as the calendar year. Confusion can arise over financial years, especially if your suppliers or customers have a different financial year to your own, so be very careful about what should be in this year's budget and what should be in the following year.

The cost of some of the budget items is fairly easy to determine. Others, like the cost of a trainer or the cost of a day of training, can become quite involved.

The cost of employing anybody is not just the cost of their wages. There are other employment costs and overheads that have to be taken into account. Table 1 gives a fictitious example of the real cost of employing a trainer whose current salary is £33000. I have assumed that the job involves a great deal of travel so that a car will have to be provided.

Table 1 Example annual employment cost of a trainer

After taking away holidays a trainer is available for work for about 220 days a year. This means that this trainer costs about £230 a day to employ. If the trainer is working at a face-to-face ratio of 50 per cent, the trainer will cost about £460 per training day.

This is a reasonably easy question to answer for a commercial course. It is simply the advertised price plus anything else such as travel, accommodation and wages that would normally be charged to the training budget.

To answer the same question for an internal course is more difficult. It all depends on:

• the type of training,
• the number of delegates per course,
• whether you train off-site or on your own premises,
• whether you use your own or external trainers,
• whether the course is residential or non-residential.

Not that you should let the difficulty daunt you. Your training plan should give you a good idea of the type and number of courses you need.

While I cannot give you any definitive answers to how much a training course costs, I can give you some examples of cost estimates for a number of different training courses. At least that will give you an approximate idea of how much training courses cost and it will certainly allow you to calculate your own costs.

In the following examples I have made the following assumptions:

• Neither the trainees' wages nor any costs due to lost production have been included.
• When training on your own premises I have not shown a direct cost for the training rooms but have assumed that this is covered by the general overhead which has been included in the cost of the trainer. (This would only reflect part of the cost of the training rooms because every employee's overhead contributes to this cost.)
• When using your own trainers the costs shown are the trainers' wages plus the general overhead plus an allowance to cover the trainers' salaries when they are not training. The same figure is used when the trainers work off-site because the overheads still have to be paid.
• Tax is not included.
• Travelling expenses are not included.

The cheapest classroom training that you can do is to use your own trainer on your own premises. Table 2 (Decision Making) is a one day, on-site workshop and is non-residential. The calculation has been made on the basis of ten students. This is a fairly typical number for skills courses that are run to meet individual development needs.

Table 2 Example of the cost of a Decision Making course

I have used the figure of £460 per day for the trainer cost. This was the figure that we estimated in the section on 'How much does a trainer cost?'. The sum of £240 for 'Materials/student' is to cover things like copies of the training materials, binders, pens, pencils and flip-chart pads. No charges are shown for room hire as the cost of the room is covered by the general overhead. The £80 shown under 'Accommodation' only needs to cover coffee for breaks and sandwiches for lunch.

Because it is a very straightforward course no equipment needs to be hired, and no expensive simulations are required. The cost per student turns out to be £78, but naturally this would change if the number of students is different.

Table 3 is very similar to the previous example with the exception that a consultant trainer was used to run the course.

Table 3 Example of costs for an Assertiveness at Work course

Costs for consultant trainers can vary wildly depending on the type of training and whether the trainers are part of a large consultancy organisation or just running their own show. These fees can range from £500 to over £1500 a day! The fee of £750 shown in this example is below the commercial average of £1000 a day for management training, but you can still get some really excellent training for around £600. With this, as in all things, a higher price does not necessarily mean better training. You have to make your own decisions on what you can afford, the type of training, the fees that the type of training normally commands and your own assessment of the consultant.

The quality training shown in Table 4 was part of the company's introduction of total quality management. The decision was taken to use the company's own trainers where possible, and it was also decided to use an off-site training facility to avoid monopolising the company's meeting rooms for the two years it would take to train every employee. The training centre did not make a direct charge for the main training room but included it in the day charge of £75 per student.

Table 4 Example of costs for a Quality course

Table 5 is a five-day residential course for first-time managers. The course runs with 15 to 20 students. Two trainers are needed to run the course. Four seminar rooms were required because of number of sub-group exercises. The accommodation charge of £180 per student per day included the main lecture room and audiovisual equipment. A tablet was used to analyse the observation data collected during the day.

Table 5 Example of costs for a Basics of Management course

The final example, Table 6, is for a middle managers' course which involves a computer simulation and extensive behavioural observations of the participants. The simulation was specially commissioned by the American parent company to ensure that, as well as giving middle managers practice in running a large organisation in coalition with other middle managers, the corporation's vision and values were clearly communicated to the participants.

This, and the previous examples, were worked out using a spreadsheet. The advantage of doing this is that once you have set up the parameters you can quickly work out the costs for a wide range of different courses.

A spreadsheet is also useful because you can 'experiment' with different numbers of trainers and students (but keeping the student-to-trainer ratio the same) to see which combination would be the most cost effective. The formulae used for this spreadsheet are given in Appendix 1.

Table 6 Example of costs for a middle managers' training course

The simulation costs include licence fees for the simulation, air fares and accommodation costs for the computer simulation consultant. The three trainers are the company's own middle management trainer and two facilitators who observe the teams and give feedback throughout the course. The equipment costs include the hire of five high-powered computers that are needed to run the simulation.

So, the cost of one student-day of training can vary from about £80 to over £350 even when you are arranging the courses yourself. Although this sounds like a great deal of money, it is still cheaper than sending everybody to public courses.

If you only have one or two people to train on a particular topic, then sending people on public courses would be more cost effective. Again, the cost of a day's training varies tremendously. For example, sending someone to a course, similar to the Decision Making workshop in Table 2, at a local management training centre would probably cost something in the region of £250. A one day non-residential course with one of the large London-based training organisations would work out at about £250 a day. Residential courses would add at least another £75 to the daily costs.

If a famous business 'guru' has come to town, you could easily sit in a room with a thousand other people and be entertained for the day for the princely sum of £500. Whether these seminars could be considered to be training as defined in my book, Managing the Training Process is debatable. In any case, you might well consider whether you would get a better deal by buying the book or the video!

Rule of thumb: If you want to get an estimate of the size of your training budget, work on an average of £250 per student-day of training. This includes the trainer's employment costs but excludes the trainee's employment costs.

You now know how much it will cost to deliver the training demand. I am willing to bet that this figure is larger than your allocated budget. In this case you will need to negotiate a larger budget or agree what training should be left out. Understanding what a reasonable training budget is can help enormously during these negotiations.

You should also prioritise the list of candidates on the basis of the urgency and importance of the training to determine who should attend the early courses as this will minimise the damage that would be done by a budget cut towards the end of the financial year.

These priorities could be decided by the training department, but I feel that the organisation should be responsible for its own priorities. One mechanism for doing this is the human resource development committee (HRDC).

An HRDC is a committee of peer managers who meet to make, review, validate or approve decisions which are related to the organisation or development of people in their own areas.

The training department brings a list of people who have been nominated for the courses which are within the committee's responsibility. As the training department has already validated the demand there should not be many people on the list who obviously should not receive the training. The committee makes a final check on the validity of the list and then concentrates on prioritising people for the limited number of training places.

The size of the training budget is one of those perennial questions which will always be difficult to answer. A way to approach this is to use 'benchmarking' which is a process by which you compare yourself to the best of your competitors with the aim of exceeding or surpassing their performance in all aspects. So, if a company in your sector is doing better than you, it would be reasonable to assume that its level of training contributed to its business success and it would be valid to compare its training investment to your own.

Getting to the figures can be difficult. This is not because of any reluctance to disclose the figures (many training managers are only too willing to share ideas and information) but because of a lack of systems to retrieve the information. It will also take time to arrange and make these visits.

You may also find that the figures have been calculated on a different basis to your own. Differences occur over the inclusion or exclusion of items such as employment costs, overheads and loss of production. You will find that most training managers exclude as many items from the cost of training as they can get away with. The most common difference is the inclusion or exclusion of trainees' wages. This is not an insuperable problem because it is possible to make an estimate.

Rule of thumb: Inclusion of wages doubles the cost of training. To give you an idea of a 'benchmark' for training budgets, successful multinational corporations recommend that each employee should receive five days of training per year. Managers should receive a further five days of management training.

Another guideline given by these companies is that the training budget, exclusive of wages and other employment costs, should be about 2 per cent of the total labour cost.

Most companies fall far short of these recommendations. Typical figures range from half-a-day to three days' training for each employee per year, with annual expenditure on training per employee varying from 0.4 per cent of total labour costs to 1.0 per cent. These figures are averages and the actual figures vary according to region, industry and size of company. Textile, footwear, clothing, construction and distribution industries are to be found at the lower end, and banking, finance, insurance and high-technology industries are to be found at the higher end of the range.

Training costs as low as 30p (excluding wages) a year per employee can be found in textile, footwear and clothing firms with fewer than 50 employees. Other typical spending levels are £7 a year in the food, drink and tobacco industry, £5 in the timber and wooden furniture sector and £45 in electrical and electronic engineering.

There is a direct relationship between the numbers of employees and level of training expenditure. Large employers have a consistently better record of training and have shown the greatest improvement over time.

The conclusion from this is that a training budget (excluding wages) of 1 per cent of labour costs is a reasonable figure, but this would need to be increased to nearer 2 per cent for 'benchmark' performance.

In a large company you could be asked to run your training organization as a profit centre. In this case you will need to consider this step very carefully and include an estimate of your income in the budget.

Being a profit centre can mean many different things so you will need to clarify the rules of the game. For example, it may simply mean you have to contribute to the budget by selling any excess training capacity. At the other end of the scale the intention might be for the training department to haven a 'zero-based' budget. This means that it has to justify and completely maintain its existence by selling all its 'products' to other departments and perhaps to customers outside the company as well.

You will also need to understand the reasons for making the training department a profit centre. It might be to put a value on the training so that managers can make a business decision as to which training they buy. It might be to keep internal training competitive with external suppliers, or maybe a profit centre was the only way to justify the cost of a brand new, purpose-built training centre.

Strictly speaking, it might be impossible to have a true profit centre without making the training department a separate company. The reason for this is that it is extremely unlikely that any company would let the training department make its own decisions with regard to staffing levels, salaries, benefits and capital investments. Even if the training organisation were given this free hand, you could imagine the amount of aggravation that would occur if you were busy recruiting trainers while the rest of the company was making people redundant.

The decision to form a separate company would be a very brave one but it also has its advantages. One curious example of this is a measure called the 'direct to indirect ratio'. This ratio, of how many direct staff you have compared to the number of indirect staff, is one of the more popular measures of a company's efficiency. By direct staff we mean the people who touch the product or its design. That is, they are directly involved with the design, manufacture or sale of a product. People who provide a service to an external, paying customer would also be considered to be direct staff.

Indirect staff are the people, such as managers and administrators, who support the direct staff. It is said that in the UK it takes one manager to supervise ten production workers, whereas in Japan it takes only one manager to ensure that 200 workers go home on time. So you can see that in the interests of efficiency, pressure will always be on to reduce the numbers of indirect staff.

All the staff in a training department would, without a moment's hesitation, be classified as indirect staff. Yet if that department were made a separate company, the trainers would then be classified as direct staff even if they were doing exactly the same work for the same people.

There is another important consideration that must be taken into account before launching yourself into a profit centre mode of operation. This is the question of who the customer is.

In a large company the training department was probably formed to meet the training needs of one organization. This organization would probably expect to have first call on the services of its own trainers, not an unreasonable request, you might think. Now the paradox of the situation is that the more successful you are as a profit centre, the less likely you are to be able to meet the needs of your own organisation, because you will be too busy training other departments' staff. (You might even be asked which department you are working for.) This need not be a problem if your organisation's needs analysis and planning have been done really well. In this case you will know how much spare capacity you have and you will be able to start taking bookings from other departments.

If you have spare capacity you might be asked why the training department needs to be as large as it is. On the other hand, if you do not have the capability to provide additional training you cannot expect your potential customers to wait a year to get their training. They will simply go elsewhere. That lost business will be very hard to regain.

The real problem arises when circumstances change, such as an urgent need to train every manager on financial control. You are asked to provide additional training for your own organization at the same time as you have contracted to train other departments. Obviously the first thing you will do will be to try to re-negotiate the contracts with your paying customers. You might be lucky and find that their circumstances have changed as well. If this doesn't work then you are faced with the question of who your customer is. Is it your own organization? After all, supporting them is the very reason for your training department's existence. Or is it the paying customers? If you cancel the contracts you will not get any business from them again. Your reputation will be destroyed and it is unlikely that anyone else would use such an unreliable supplier. Perhaps the only way around this, if you are really serious about running the training department as a profit centre, is to take a loss on these contracts and bring in consultant trainers to take on some of the work load.

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This spreadsheet shows how Table 6 was put together.

• Set Default Currency to £
• Set Range B11..B19 and C11..C19 to Currency Format, 0 decimal places
• Type the following into the cells indicated: