Financial and Nonfinancial Ratios as Indicators of Business Health

Financial ratios are another important tool that can be used to analyze an organization's performance. A financial ratio compares two values; the result is a useful measure that can be compared to benchmarks of financial performance.

One argument against excessive use of financial measures is that they can overemphasize the importance of short-term results. Viewing financial results as trends can help lessen this effect.

In addition, financial measures must always be used within the context of a specific industry. Profit margins, for example, are very different in financial services than they are in manufacturing consumer goods. Part of the discussion with colleagues from finance should include understanding industry metrics and how the organization compares with similar enterprises.

Exhibit lists some common financial ratios and describes their significance and how they are calculated. We have already mentioned some of these ratios in our discussion of the income statement.

From Numbers to Insights: Financial Reports That Drive Business Decisions

 HR professionals should become familiar with key financial statements that the organization and its stakeholders use to measure the organization's health and to plan actions-the balance sheet, the income statement, and the cash flow statement. These statements are integrated. Information from one is used in creating the other statements.

Understanding the financial statements helps the HR professional:

Understand the perspectives of internal and external stakeholders. HR professionals can better understand the economic issues driving management decisions (for example, poor profit margins relative to industry, inadequate cash flow to cover wages, large deductions from gross sales caused by returns). Investors analyze financial statements to gauge growth opportunities and identify risks, such as too much debt.

Identify opportunities for HR to improve the organization's financial performance (for example, developing new competencies aligned with financial goals). The HR function can better fulfill its consultation role to organizational leadership.

Understand factors that may affect HR strategies. For example, weak revenue may affect executive compensation. Poor cash flow or ability to incur debt may limit internal investments in a new HR information system.

A good way to gain financial perspective and understanding is to consult with colleagues in finance. Meeting regularly with a financial officer will increase an HR professional's understanding of the financial values driving strategy and operations. It is also an opportunity to learn about the challenges facing the financial managers and consider ways HR activities might help. These discussions may create an influential ally and advisor when crafting HR initiatives.

Balance Sheet

The balance sheet is one indicator of the organization's financial health. It is a statement of the organization's financial position- its assets, liabilities, and equity- at a particular time. Exhibit 39 displays the balance sheets of a fictional company on December 31 of two consecutive years. We will refer to this sample throughout the following description of the balance sheet.

The key word in the term "balance sheet" is "balance." In accounting, all transactions should be balanced: Any money entered as an asset is balanced by offsetting liabilities. To illustrate this, consider that, in our example, ABC's factory buildings and land are valued in year 2 at $59,600,000. This asset is balanced by a note to a bank for, let's say, 60% of its value, or $35,760,000. The remainder of the asset's value, $23,840,000, is considered equity value held by ABC's owners and shareholders.

HR Budgeting: How to Plan, Justify, and Align HR Costs with Business Strategy

HR Budget

The HR budget includes:

Ongoing operational costs related to HR's essential services, such as recruitment and selection, employee relations activities, and talent management.

Overhead costs that do not directly contribute to HR function and service provision, such as utilities, maintenance, and other costs related to occupancy.

One-time project costs planned to support HR strategy and objectives (for example, an executive salary review).

The operational side of the HR budget includes resources that are directly related to staffing and expenses required to provide HR services to internal customers. This budget ordinarily includes resources related to:

·          Talent acquisition.

·          Training and development.

·          Compensation and benefits.

·          Employee and labor relations.

·          Health, safety, and security.

·          Information technology.

·          Planning.

·          Philanthropy.

Many of these expenses are variable and will be affected by the organization's and HR's strategies. For example, growth and retraction strategies will affect employee head count and may involve additional expenses for recruiting or outplacement services. A strategy that requires a change in organizational structure or culture will probably require funding for consultants and development activities.

Therefore, the first thing HR leaders must do in the process of allocating resources to strategic activities is to compare previous/current activities and budget allocations with what will be needed to support the proposed organizational strategy. Having several years of HR data to establish rules of thumb and trends in expenses will be helpful in defining a new budget.

How Strategic Budgeting Drives Organizational Success: A Guide for HR and Business Leaders

Budgets as Strategic Tools

Budgets do more than just track numbers—they help organizations make smart choices about where to put their limited resources. By focusing spending on the right programs and activities, budgets help teams move closer to the organization’s big-picture goals. This alignment needs to happen both across the organization and within individual departments.

During each planning cycle, budgets guide how resources are spread out—whether it’s for the entire organization or for a specific project. No matter the type, every budget acts as a planning and performance tool. It helps predict when money will come in, when it will be spent, and what kind of work or results are expected.

Budgets also promote accountability and transparency. Teams get regular updates on their budget performance, and how well they stick to the plan is often used to evaluate their success.

For HR professionals, understanding the budgeting process is essential. HR must often compete with other departments for limited funding. Whether asking for support for day-to-day operations or a new initiative, HR needs to show how the investment will not only support people and processes but also move the organization closer to its overall strategy.

The Budgeting Process

Budgeting can look different from one organization to another. Many use a mix of top-down and bottom-up approaches: leadership sets the overall direction, and departments respond with what they need to make it happen. The final budget usually comes out of discussion and compromise. This helps ensure that both the strategic goals of the organization and the practical needs of each team are taken into account.

Mastering Business Intelligence: A Strategic Guide to Smarter Decisions and Future-Ready HR

 

Business Intelligence

Business intelligence can be described as the ability to use information to gain a deeper understanding of an organization and its parts, to see how. The whole organization and its parts are performing (through business metrics) and to make sound business decisions that are grounded in relevant and accurate facts rather than assumptions or "gut feelings." A commitment to good governance requires more informed, transparent, and accountable decisions, and better business intelligence makes those decisions possible.

An organization's business intelligence system has three basic components:

·         Data gathering. Data is routinely gathered through different computer systems in all parts of the organization (for example, point-of-sale performance, purchasing and sales transactions, employee and customer records, security terminals).

·         Data warehousing. Data gathered from different systems is translated into a standard format, cleaned (or "scrubbed") of errors and duplications, and then stored in databases related to specific uses (for example, operations, finance, sales, HR). Organizations that have invested in an enterprise resource planning (ERP) system are able to integrate these distinct databases. This allows everyone in the organization access to the same current data and improves communication and coordination. ERP products are "suites" of integrated applications for special purposes, such as those shown in Exhibit 36. The data warehouse is integrated but divided into separate sections or data marts that share reporting and analytical needs or interests. For example, the human resources information system (HRIS) captures data related to managing tasks such as payroll, workforce planning, performance appraisal, training and development, and succession planning. Some ERPs actually extend outside the organization by supporting electronic data interchange (EDI). Among other purposes, EDI is often used to automate outsourcing and vendor payments.

·         Query and reporting capabilities. Users can access the data they need and use stand-alone or integrated (ERP) business application software to sort, describe, and analyze data in myriad ways and to create report graphics, such as bar or pie charts.

Business Intelligence Portals

A business intelligence portal is a user's point of access to the data and applications stored on an information system. An effective business intelligence portal:

·         Can be customized to the needs of specific users so that they view only the data and applications they commonly use. This simplifies navigation and avoids overwhelming users with visual options and requiring layers of actions. This is an important factor for HR when selecting or designing self-service portals for managers and employees.

·         Presents information logically. A well-designed screen uses visual cues (for example, color, size, screen location, adjacency) to denote logical relationships.

·         Supports easy navigation from the home page to and within desired files.

·         Uses automated tools such as "click to open" and "drag and drop."