Help me! I am the HR Manager at a medium-sized product-and-service organization. Our business is growing, the new products are really doing well, and we want to hire more employees. At the same time, our CFO is telling me we do not have the money, and we might have to reduce our headcount. How is this possible?
Brace yourself: The answer involves understanding how the organization makes money, accounts for that money, and how that information is used to make business decisions. Yes, this means venturing into the world of–Yikes!–numbers.
HR professionals are increasingly required to have financial and business acumen. According to the Society for Human Resource Management (SHRM), Business Acumen addresses an HR professional’s ability to understand business operations and functions, the organization’s external environment, and how human resource management practices contribute to core business functions. HR professionals who are proficient within the Business Acumen competency are able to recognize how internal and external factors interact to influence organizational performance. It is even part of the new SHRM competency model and a component of the SHRM Certified Professional and Senior Certified Professional exams.
In a study released in March of 2015, Ocean Tomo, an international consulting firm, reported the level of tangible assets (plant, equipment etc.) versus intangible assets (intellectual property, brand, software, etc.) of Fortune 500 companies. In 1975, 83 percent of assets were tangible and 17 percent were intangible. In 2015, these figures were just the opposite: 84 percent intangible and 16 percent tangible. While a variety of conclusions can be drawn from the data, it is clear the tide has turned from physical assets to human capital.
The pull, or perhaps the push, depending on your perspective, to be financial stewards is actually good news for HR professionals. Yes, it is scary, but a quick look behind the financial curtain reveals that much of “finance” is simply addition, subtraction, and occasionally, division. Really, that’s it! You do not need to be an expert in generally accepted accounting principles (GAAP) to add value to the financial decision-making process. What you do need is to blend your analytical skills with basic accounting principles when faced with a business issue or when you are in a business planning mode.
Let’s return to our opening scenario. The business is growing, new products are selling well, we need more people to meet demand, but the CFO is worried. Why? We will explore two possible reasons for this apparent paradox.
First, while new products are selling, the older products might be gathering dust in the warehouse. Accountants call this “inventory,” and while inventory is considered an asset, it also ties up cash. Organizations need cash to purchase materials to create new products.
Second, sales are increasing, but customers may be dragging their feet when it comes to paying the invoice. So, while the organization records high sales figures, it might not have the cash on hand to pay for little things like salaries and benefits.
What is really happening is that while sales/revenue is growing, the organization lacks the appropriate level of working capital (essentially cash) to fund growth. So what can the HR Manager do to positively impact the business? The answer is to ask questions and offer solutions that have positive Return on Investment. For example:
Are customers delaying payment because of delivery, quality, or invoice issues?
Action: Calculate Days Sales Outstanding (DSOs). The formula for DSOs is Accounts Receivable/Revenue per Day. Create training programs to increase customer satisfaction and reduce DSOs.
Can inventory be aligned with current product demand?
Action: Create an incentive plan to reduce old inventory.
Human resource professionals as financial stewards may seem like a paradox. But as human capital and intangible assets become the predominant means of sustained organizational success, HR must embrace this emerging role. The Financial Foundations for HR class (HR171) on April 12, 2016 is a great opportunity to learn more about this emerging and exciting area of HR. Please call 303.894.6732 to register.