Can an organization look profitable and be near bankruptcy at the same time? Can the way depreciation is accrued impact profitability? What is the difference between cash flow from operations versus investing versus financing, and does it matter? And finally, why should Human Resources professionals care?
The answers are: yes, yes, yes, and because the nature of business is changing and HR professionals must increase their financial and business intelligence to be effective. Larry Godfrey, the assistant dean of the College of Human Resources and Labor Relations at General Motors, puts it this way: “We need businesspeople who do HR, as opposed to HR people who support the business. I think there is a pretty significant difference in the phrasing of ‘the.’”
In a study released in March of 2015, Ocean Tomo, an international consulting firm, reported the value of tangible capital (plant, equipment etc.) versus intangible capital (intellectual property, brand, software, etc.) of Fortune 500 companies. In 1975, 83 percent of assets were tangible, 17 percent intangible. In 2015 these figures were nearly reversed, with 84 percent intangible and 16 percent tangible. The tide has turned from physical assets to human capital.
For Human Resource professionals this trend means we must develop four distinct skill sets:
First, we must understand the foundation. HR professionals who are financially intelligent understand the basics of financial measurement and reporting.
Second, we must understand the art of business. Finance and accounting is an art as well as a science. HR professionals must understand the difference.
Third, once we have this foundation, we must be prepared to ask questions, conduct analysis and provide solutions.
Fourth, HR professionals must understand the “big picture.” Financial results must always be understood in context; that is, within the framework of something bigger.
HR must learn and speak the language of business, which is finance. We must be prepared to ask questions and to use information to inform and influence business decisions and results.
In 2016, MSEC will offer a new class specifically designed for HR professionals on understanding how business works though a study of the Income Statement, Balance Sheet, Cash Flow Statement, and Ratios. The class is titled: Financial Foundations for HR. The first class is scheduled for April 12, 2016.