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Attrition Budgeting

The Guessing Game of Attrition Budgeting

One problem with budget models is trying to anticipate the number of employees who will leave the company during the budget year, which is expressed as a general reduction in the wage expense.  One option is to budget for no departures, which results in the maximum possible wage expense, and one which the budget preparer knows in advance is unlikely to occur.  Another possibility is to attempt to predict exactly who is leaving, and when, which is subject to an extraordinary degree of error.

The Attrition Percentage

An alternative approach is to incorporate into the budget an attrition percentage that is based on a company’s historical experience.  This is the only alternative that has some justifiable basis. It tends to be more accurate in larger companies, since averages work better across several thousand employees than just a few dozen or hundred.  To derive a reasonable attrition percentage, review the attrition for the past year and strip out those departures caused by one-time events, such as the closure of a facility.  Also, if the job market is tightening and the company employs mostly skilled positions, then assume that the replacement interval for positions will be longer, which results in a higher attrition percentage.

Since the timing of attrition is nearly impossible to predict, it is easier to apply the same percentage across the entire year.  It may be more inaccurate earlier in the year, but the average level of attrition should move closer to the anticipated level by the end of the year.