Essentials of Finance for HR Professionals

Essentials of Finance for HR Professionals

Essentials of Finance for HR Professionals

Download Free Ebook: Understanding Financial Information from the link- http://www.hrmleaders.com/uploads/blog_files/1593516426.pdf

High performing HR Professionals are those who are highly informed about financial aspects of business in organizations.

Earlier people believed that HR not need to know all details of finance, currently this idea is not valued. In present business world, it is expected from HR professionals to know at least enough to understand how money flows and to ask informed questions when necessary.

Here are some of the absolute basic terms HR professionals should be aware of:

  1. Income
  2. Assets
  3. Expenses
  4. Liabilities
  5. Taxes

At the end of the day, what must happen with these variables to stay in business? As you can most likely guess, you must have more income and assets than you have expenses, liabilities, and taxes. If your company bumps around breaking even, it’s not going to stay in business long. It’s straightforward—we have to make more money than we spend.

The ‘Positive’ Side of the Ledger

  1. Gross Income (Gross Profit). This is defined as revenues minus cost of goods sold (i.e., materials). While the cost of goods is factored in, this does NOT take into account all expenses.
  2. Net Income (Net Profit). This is what remains after necessary expenses are deducted. The expenses that are “necessary” vary from business to business—engage with your finance people to see what is necessary to your company vs. what is discretionary.
  3. Assets. Assets are the “stuff” businesses own that are worth something. Assets can take many forms and can be both tangible and intangible. Assets might include cash in the bank, property, copyrights, patents, brands, customer service models, and even goodwill/reputation.

The ‘Negative’ Side

Every company has expenses and liabilities—they are simply the cost of doing business. Organizations can have many categories of expenses, including (but not limited to):

  1. Cost of Goods Sold (COGS)
  2. Wages, benefits, and incentives
  3. Capital Expenditure (CAPEX) (an amount set aside for 1 year to build something tangible or renovate a tangible asset (e.g., a new software system or property))
  4. Research and Development (R&D) expenses (any expenses incurred in the process of finding or creating new products and services; like CAPEX, these expenses vary greatly by industry)
  5. Depreciation and amortization
  6. Telephony (i.e., communications), insurance, and rent
  7. Product or service components

Budgets

All of this money coming and going can be tracked through a budget. Simply put, a budget is a planning tool that brings all the financial aspects together into a coherent, logical whole. Budgets are in place to help companies meet financial goals, and many smaller budgets fit into the budget of the company as a whole. Some common types of budgets include:

  1. Operational budgets. These are generally 1-year budgets, based on the fiscal year for the particular organization. The numbers here must be based in the real world for the budget to be a realistic planning tool. They can be built from the top down, bottom up, or collaboratively. HR pros should understand that the operations world is VERY budget-oriented, and they should empathize with this constraint on managers and employees.
  2. Capital budgets. These are generally “use it or lose it,”, and for a certain predetermined amount—the CAPEX. The amount of capital available at any given time for new projects is limited, and departments are literally competing for these funds. So, if you’re looking for that brand new HRIS system, understand it’s competing for scarce dollars—you need to build a strategic financial case.

The Balance Sheet

A common report to be familiar with is a balance sheet, which is a statement of the company’s financial position on a particular date—all assets compared to all liabilities. It is a snapshot, a historic document of what exists at that point, and, naturally, it should balance. Your total assets must equal your total liabilities—any difference is made up by owner or shareholder equity.