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- Money, Metrics, and Motivation: HR's Journey into the Financial World
Money, Metrics, and Motivation: HR's Journey into the Financial World
Insights by Kartik Tajbul
In today's workplaces, you'll find people from different age groups, each with their own values, expectations, and experiences. Kartik Tajbul, is a seasoned Chartered Accountant with extensive experience in financial reporting, M&As, and IPOs.
Understanding Finances in HR
In every organization, different departments may not always get along. For instance, sales and marketing might not see eye to eye, and similarly, HR and finance may have some disagreements. However, just as sales and marketing can achieve more by collaborating, HR and finance could form an excellent partnership if they avoid unnecessary conflicts.
HR finance refers to integrating HR and finance functions within a contemporary organization. Traditionally, HR and finance operated as separate entities, each with distinct roles. However, HR professionals are increasingly expected to possess financial knowledge in today's business landscape.
Finance primarily deals with the allocation and oversight of resources to achieve organizational objectives, maintaining an equilibrium between income and expenses. In contrast, HR focuses on recruiting, motivating, and managing personnel contributing to those objectives.
It is now essential for the HR and finance departments to work together to promote the company's objectives.
The Importance of Finance Knowledge for HR
Employee-related expenses, such as salaries, benefits, and associated taxes, often constitute up to 70% of a business's total operating costs. Consequently, in many companies, the initial stages of planning and budgeting involve collaboration with the HR department.
HR professionals play a crucial role in preparing and managing budgets for all departments within the organization. In the contemporary business landscape, having financial awareness is imperative for HR professionals.
Their understanding of finance and accounting is vital for them to effectively contribute as strategic partners in the planning and management processes of a large organization.
Another important aspect of HR's need for financial knowledge is its role in attracting top talent. Nowadays, prospective employees are well-informed and conduct thorough research about a company before considering employment.
When engaging with HR for potential employment, the most skilled individuals in the job market might request to examine a company's financial reports to assess its standing compared to competitors.
The Foundations of Finance for HR
Human Resources (HR) professionals need to grasp fundamental financial concepts from the beginning and continually enhance their understanding throughout their careers.
Key Financial Terms for HR
Here are some fundamental financial terms that HR professionals should be familiar with:
Debit and Credit
Debits and credits are terms used in double-entry accounting systems to record transactions. A debit entry increases the value of an asset or expense account, or it decreases the value of equity or liability. A credit either adds to what the company owes (liability) or to its ownership value (equity).
For instance, if a company buys supplies on credit for $500, the entry would be a debit to the supplies (asset) account and a credit to the accounts payable (liability) account.
Owner's equity, sometimes called shareholder's equity, represents the value that would be left for the owner or shareholders after selling off all the company's assets and settling all debts.
For instance, if a company sells $10,000 worth of common stock and retains $5,000 in earnings, these contribute to the overall owner's equity.
Revenue is the complete income a business earns from its main activities. Examples of revenue include money received from rents, dividends, interest, and adjustments made for sales returns and discounts.
For instance, if a company sells goods for $1,000, that amount contributes to the overall revenue.
An expense is a cost that a company incurs in its day-to-day operations to generate business revenue. It represents the cash outflow for obtaining goods or services necessary for business activities.
For instance, if a business spends $500 on utilities for the month, that amount is considered an expense.
Cash flow pertains to the total amount of cash entering and exiting a business during a specific timeframe. It includes cash received, which is the money coming in, and cash spent, which is the money going out.
For instance, if a company receives $1,000 in customer payments and pays $500 for expenses in a month, the overall cash flow is the difference between the money received and spent.
Challenges in Human Resources Related to Finance
The arrival of the pandemic not only sustained existing HR challenges in the financial services industry but also introduced a range of new difficulties. HR professionals in this sector were confronted with the unprecedented shift to remote work, the implementation of Covid-related safety measures for essential on-site staff, and the formulation of remote work policies for other employees.
As per a survey conducted by the global public relations firm Ketchum, 52% of employees in the financial services sector reported experiencing higher levels of burnout at work compared to the period before the onset of COVID-19.
Providing Support to Employees
The connection between employee mental well-being and the support offered by employers is significant.
According to Brad Smith at meQuilibrium, employees in the finance industry, like many others, are facing challenges and experiencing distress. The impact of employer support is profound.
With remote work blurring the boundaries between work and home life, leaders should promote the idea of employees taking time off. This applies to everyone, from single mothers to new hires. Consistent communication from company leaders can enhance the overall well-being and morale of employees.
Diversity and inclusion have become more prominent concerns, and attracting and retaining diverse talent stands out as a key challenge in the financial services industry. Notably, there are substantial gaps for women and people of color within this sector.
A 2021 McKinsey report highlights the underrepresentation of women, especially women of color, at all levels beyond entry positions. The top echelons of the financial services industry, in particular, remain predominantly male.
To address this challenge, HR leaders need to explore avenues beyond internal promotions or recommendations from existing staff when seeking new talent.
Maintaining Virtual Connections
Before the COVID-19 pandemic, only 29 percent of financial services companies had over 60 percent of their employees working from home at least once a week, as per PwC's Remote Work Survey.
This shift towards remote work is expected to persist and even gain momentum. 69 percent of financial services firms predict that 60 percent or more of their employees will continue to work from home at least once a week post-pandemic.
Executives believe that remote work benefits employees and boosts productivity. According to me, Quilibrium, 88 percent of financial services workers found work-from-home arrangements to be the most helpful form of support from their employers.
Advantages of HR-Finance Collaboration
When HR and Finance consistently collaborate on strategic workforce planning, your organization can realize three key advantages.
Improves the Strategic Role of HR as a Business Partner
Human Resources (HR) plays a crucial strategic role in organizations. However, this role becomes challenging when HR teams spend significant time manually updating spreadsheets. Instead of dealing with data hassles, your HR team should focus on analyzing metrics to achieve tangible outcomes.
As an example, Joe Taranto, an HR Generalist and Project Manager at Rémy Cointreau, estimated spending four to five hours per week manually updating the company's organizational chart.
In monetary terms, this equates to a productivity loss of $15,000 annually. Moreover, this time-consuming process hindered him from promptly sharing essential insights.
Raise of Financial Performance
When HR and Finance work together, it results in well-informed decisions based on data for workforce planning.
This, in turn, contributes to more strategic allocation of resources, particularly in areas like payroll, talent development, and fostering workplace culture.
In the past, Finance might have independently assessed the effects of compensation plans, bonus structures, and employee incentives on the company's profitability.
Show the Concrete Return on Investment for Workforce Investments
One of the challenges in workforce planning is balancing the need to invest in areas that make the company an attractive employer while also proving the tangible return on investment (ROI) for talent development expenses.
HR teams often emphasize aspects like company culture and employee experience, leading to requests for increased budgets for benefits, talent development, and compensation structures.
However, without a collaborative effort with Finance, HR teams may find themselves having to justify their budget requests and translate their plans into financial terms independently.
HR and finance both work towards the goals of the company. That's why HR should understand finance. Since HR deals with costs and revenue, knowing about finance can benefit the company a lot.