How HR can use financial information

      The decisions HR makes daily can either promote or impede the organization’s financial performance. Recent research by management and consulting firm McKinsey found that  organizations with HR that make decisions fast and efficiently are twice as likely to record as much as 20% higher financial returns. Here are ways HR can use financial information to  make better decisions.

• Improving financial strategy: HR needs to understand the factors that drive costs and revenue in their organization. This will help them make decisions that promote the company’s overall goals and objectives. HR departments that make better decisions are an invaluable strategic business partner that helps the organization reach its outcomes more efficiently.

• Creating value across the organization: A company fares better when HR and finance are collaborating effectively. When both departments are working together, the organization, in general, will better maximize returns on its people. For instance, HR can partner with finance to create a working hiring model that factors in scenarios such as the company’s forecasted growth and optimizing the costs of recruitment and training.

• Carrying out resource analysis: An organization’s financial statements come in handy when analyzing and interpreting its financial health. HR can make more informed decisions on how and where to allocate resources and what strategies work best to advance the organization toward its goals.

• Estimating the financial impact of projects: To effectively manage a company’s human resources, HR must decide which projects and initiatives are worth the investment and which are not. HR can use cost and revenue data from finance to calculate the ROIs of these projects to estimate profits even before the company starts or completes a project.

 

Here are the basic financial terms HR should know:

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  1. Debit and credit

Debits and credits are terms that refer to transactions entered in a double-entry system of accounting. A debit is an entry that increases the value of an asset or expense in an account or decreases the value of equity or liability. A credit increases a liability or equity or decreases the value of an asset or expense in an account. A debit is entered on the left side of the ledger, while a credit is entered on the right.

For example, when a business purchases a new asset worth $1,000 on credit, the amount would be entered as a debit in the equipment (asset) account and a credit in the accounts payable (liability) account.

 2. Transaction

A transaction is a business event with a financial impact on an organization’s financial statement. A transaction is entered into an accounting record, typically in the ledger. For example, when a company pays a wage for a service rendered, the amount is recorded in the wages payable account of the balance sheet.

 3. Account

An account is a record in the financial ledger that is used to store, categorize, and sort transactions. For example, most companies have a Cash account that is used to record all transactions that increase or decrease the company’s cash monetary value.

 4. Asset

The term asset refers to anything with current or future economic value owned by a company. Examples of assets are investments, tools, equipment, machinery, and patents.

 5. Liability

A liability is an organization’s obligation to pay money to individuals or other organizations, now or in the future. In other words, a liability is a debt owed to a person or another company. A business does not make money from liabilities. Examples of liabilities are bank debts, taxes owed, and money owed to suppliers.

 6. Owner’s equity

Also referred to as shareholder’s equity, owner’s equity is the amount of money that would be given to the owner or shareholders if all the company’s assets were liquidated and all debts paid off. Examples of owner’s equity include common and preferred stock, retained earnings, and additional paid-in capital.

 7. Revenue

Revenue is the total amount of income that a business generates from its primary operations. Some examples of revenue are rent, dividend, interest, and contra revenue from sales returns and sales discounts.

 8. Expense

An expense is an operational cost that a company must pay to earn business revenue. It refers to the outflow of cash in return for incoming goods or services. Examples of expenses are rent, utilities, wages, insurance, and costs of goods sold.

 9. Cash flow

Cash flow refers to the amount of cash that comes into and leaves a business within a specified period of time. Cash received represents money coming in, while cash spent represents money going out.

 10. Liquidity

Liquidity refers to how easily a business can meet its financial obligations with its assets. In finance, liquidity typically refers to how much cash the business has and how quickly it can convert its assets or security into cash without impacting its market price.

11. Working capital

The working capital of a business is the amount of money available to meet its current short-term obligations. In accounting, working capital is the difference between current assets and liabilities. For example, if a business has $1,000 in the bank and $500 in cash, and pending accounts totaling $400, its working capital would be $1,100.

12. Human capital

Human capital refers to the economic value that a person or group brings to an organization. It covers their training, skills, knowledge, health, motivation, and loyalty. Examples of human capital include communication skills, creativity, experience, and problem-solving skills.