Your training budget needs to be more than a shot in the dark, but how can you go about calculating it and producing an accurate prediction of your training costs?
Not only will those approving your training budget want to see some justification for your calculations, but your budget allocation also plays a significant role in your overall strategic planning for L&D.
With that in mind, here are some tips for calculating and formulating your training budget cost estimates for the year ahead.
Accurately estimate your training budget and keep everything on track with this downloadable training budget template and tracker.
What is a training budget?
A training budget is a blueprint that details all of the costs of training your company will incur to ensure that your workforce has the skills and knowledge it needs to perform well. It covers what will be spent for courses, materials and training, and also sets out how the training budget will be allocated.
In addition to guiding training program cost estimates, a robust training budget provides a framework that allows you to assess whether or not your learning and development spending aligned with budgeted amounts. For example, did you underestimate the funds needed for online training or overestimate the classroom training spending? Were the costs to attract and retain qualified L&D team members higher than anticipated?
A learning and development budget is a critical early step to ensuring that your L&D program operates effectively and produces results that contribute to ROI and other KPIs.
How much do companies spend on training per employee?
According to the 2021 Training Industry Report published by Training Magazine, the average company spent $1,071 per employee on training in 2021. This was $40 lower than the $1,111 per employee spent in 2020.
The amount varies considerably, though, among companies of different sizes. Again referencing the 2021 Training Industry Report, small companies (100-999 employees) spent the most on training per employee–$1,433–even though their spending decreased by over $200 per employee from 2020. Mid-sized companies (1,000-9,999 employees) nearly doubled their spending per employee in 2021, up to $902 per employee. Conversely, large companies (over 10,000 employees) decreased the training amount spent per employee about 20%, from $924 in 2020 to $722 in 2021.
These figures demonstrate wide variability in how much companies spend on training per employee and indicate that training costing is not a one-size-fits-all activity.
How to calculate an estimate of your training budget
“How to calculate training budget?” is a question many companies ask routinely. In fact, there are multiple ways to answer that question as you establish your learning and development budget. You might choose one or use a combination of calculations to estimate your overall costs.
1. Percentage of salary budget
According to Capterra, organizations generally spend anywhere from 1-5% of their salary budget on training annually. If this is the first time you’ll be calculating a training budget, this method is a simple benchmark to use.
This means your budget calculation will be as follows:
Training Budget = Annual Salary Budget x X%
After one year of this budget, you can reassess and see if it fell short of the mark before moving onto more detailed calculation methods.
2. Percentage of average employee salary in your industry
Another common way to estimate the cost of training for the year ahead is to use the average employee salary within your industry.
The calculation will be as follows:
Training Budget = Industry Average Salary x No. of FTEs
This can be helpful if you’re expecting large fluctuations in staffing levels in the near future as you can easily adjust the calculation to take future hires into account.
3. Detailed breakdown of training needs and cost estimates
The above calculations are relatively quick and easy. You don’t need to source too much data, and they provide a bit of leeway. However, they’re not likely to be 100% accurate, meaning you could easily end up underestimating the training budget you need.
A third way to judge the size of your training budget is to develop a detailed cost breakdown based on the initiatives you have planned and on past experience. This means taking into account your L&D employee costs, learning technology, external vendors, travel and expenses, etc.
Although this method takes the longest to calculate, it provides the most accurate estimation of your predicted training costs.
Tips for training budget allocation
Once you have a budget estimation in front of you, the next task is deciding how to allocate that budget. Some costs, such as the salaries of your L&D team members, will be set in stone. Others will offer a little more flexibility and present you with some options.
So, here are some tips for creating a realistic budget allocation plan for your learning program.
Plan for all eventualities
Everyone has a plan until that plan is no longer viable. As the year progresses, a lot can change–both internally and externally–for your organization. Shifting priorities means your initial budget allocation is no longer optimal as time goes on.
So, plan for as many eventualities as you can when it comes to allocating your training budget. If you leave some wiggle room, it’s easier for you to adjust your allocations as needed throughout the year.
Expect the unexpected
Similarly, you can’t predict the unpredictable. But you can ensure your budget is prepared for anything that might be thrown your way throughout the year. As well as remaining flexible with your budget allocation, it’s a good idea to be prudent about it, too.
Consider setting aside a percentage of your budget to cover unexpected shifts in organizational strategy or training needs. This will enable you to bolster training projects that become more expensive than expected and cover any initiatives that were not initially planned for.
Don’t forget content updates
While you might be focused on new learning initiatives when planning your training budget allocation, don’t forget that some of your existing training courses and content will need updating and refreshing throughout the year.
So, while calculating your budget and allocating it across different costs, include any predicted training updates as well as new initiatives.
How to maximize the impact of your training budget
Unfortunately, no team’s budget is completely unlimited. Creating the biggest impact possible with your training budget means making the most of what you have. Here are some tips for maximizing budgets of every size for L&D.
Track every nickel and dime
Throughout the year, track how your actual costs compare to your estimates. Certainly, you want to know whether you’re staying within your budget guidelines as a department. But that’s just the first step.
What you really need to know is how specific cost categories are performing. For instance, are your actual training program development costs outpacing the budgeted amounts? Closely tracking budget amounts compared to actual expenditures will help you understand what your L&D priorities need to be. Careful monitoring of budget shortfalls will also help you verify your need for more resources when the next budget meetings roll around.
Following where every bit of your L&D budget goes will also help you identify any budget leaks that may occur. Common L&D budget leaks include the areas of capacity planning–aligning tasks with qualified personnel to perform them–and training intake–identifying the best options for training initiatives. Careful expenditure tracking highlights leaks and helps you plug them.
Develop robust learning measurement practices
When it comes to allocating a higher budget for L&D, C-suite members are most likely to be swayed by metrics that conclusively prove the impact of a learning initiative on the bottom line of the business. Although learning measurement can be a time-consuming and complex task, it’s worth its weight in L&D budget. Start by assessing where your measurement practices currently fall in The Kirkpatrick Model of training evaluation and make working your way up the scale a priority.
Focus on efficiency
Sometimes, it’s less about the dollar amount of your training budget and more about how your learning operations are set up to spend it most effectively. Conduct a total L&D audit to examine how your team could be more effective while working efficiently. You may be surprised to discover that you can save significant chunks of time and budget without having to downsize your L&D offerings. An operational upgrade–rather than a higher budget–may produce the desired results.
How to handle proposed training budget cuts
According to Training Magazine’s 2022 Training Industry Report, 13% of the respondents said their 2022 training budget decreased. Of that number, 25% reported decreases of 16% or more. If your company is one that expects to decrease spending for L&D, how should you respond?
Coach Vince Lombardi’s famous quote, “The best defense is a good offense,” applies to proposed training budget cuts as well as it does to gridiron contests. The L&D team that can go on the offensive and show–specifically–how their activities contributed to the bottom line has a good chance of defending against budget cuts.
Solve small but meaningful problems
In a recent Cognota webinar entitled L&D and Business Alignment, J.D. Dillon, Chief Learning Officer at Axonify, emphasized that it’s critical for L&D teams to routinely solve small but meaningful problems that show evidence of their ability to impact situations. Doing so demonstrates that the L&D team is a group that enables accomplishments that assist others as they solve problems.
If your organization views your L&D team as impactful, it will be less likely to pressure you for budget cuts, especially if you show an in-depth understanding of where every budget dollar went and why it was necessary. Accomplishing this is very difficult unless you have a learning operations or LearnOps point of view that makes L&D relevant at every level.
Keep your L&D skills polished
In the same webinar, Mike Taylor, Learning Consultant at Nationwide, noted that keeping your L&D team’s skills polished is essential to defending against budget cuts. Well-trained learning and development professionals with top skills and current knowledge are better able to build and distribute learning experiences that enable everyone in the company to solve problems.
Additionally, skilled L&D professionals are in a position to accurately evaluate both the strengths and the weaknesses of learning and development activities. An L&D team with in-depth knowledge of their value to the company, coupled with a willingness to point out areas where training can be strengthened, is able to make a strong defense against budget cuts.
You can set, optimize and track your training budget with a platform that helps eliminate the guesswork
To maximize the impact of your training budget, you will need to track expenditures carefully, measure results routinely, and focus on efficiency. Doing so will prepare you to defend your training funds from proposed budget cuts. You have several options when it comes to calculating an estimated training budget. Regardless of the option you choose, you’ll want to allocate your budget funds carefully, with an eye for flexibility so that when unexpected events occur, you can react quickly.
One key to setting, optimizing and tracking training budgets is developing a LearnOps mindset that melds all your company’s training efforts and responsibilities, is empowered by technology that allows seamless integration with your existing tech stack, and provides real-time tracking of your team’s workload and capacity. Cognota’s LearnOps software enables you and your L&D team to make the most of every budget dollar. Get started for free or speak with sales to learn more.