Finance and HR: A Strategic Partnership

Finance and HR work together to strategically achieve company objectives, balancing costs and revenue with effective workforce management. HR professionals require strong financial acumen to support budgeting, resource allocation, and talent acquisition.

By Brad Nakase, Attorney

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Table of Contents

1. How is finance related to HR?

2. Human Resources’ Potential Use of Financial Data

3. The HR financial groundwork

4. Figuring out what financial records mean

5. Making Sense of the Income Statement

6. Grasping the concept of the balance sheet

7. Getting a handle on the cash flow report

8. Gaining insight into HR costs

9. The HR budgeting process

10. Important financial HR KPIs to think about

11. Wrapping up

How is finance related to HR?

In modern companies, the human resources and finance divisions work together as HR finance. Despite the fact that human resources and finance have always operated independently, financial expertise is now an essential skill for HR workers in today’s companies.

Allocating and overseeing resources that contribute to the organization’s objectives while maintaining an equilibrium between expenses and revenues is the primary function of finance. Conversely, it is the job of human resources to find, inspire, and oversee the individuals who will work to achieve those objectives. Human Resources and Finance must now work together to achieve the company’s objectives.

A company’s overall operating expenses might be as high as 70% labor expenditures, including salary, benefits, and related taxes. For this reason, human resources is often the first department consulted when formulating company plans and budgets.

Human resources experts should be well-versed in creating and overseeing departmental budgets. Human resources experts in today’s firms must possess strong financial acumen. If they want to be valuable strategic allies in a big company’s planning and management, they need to know their way around accounting and finance.

The responsibility for achieving the budget also falls on HR, who not only assist with budgeting but are also directly involved in the process. An in-depth understanding of HR financials is essential for any position in today’s HR department.

As more and more businesses put money into ERP and other linked business processes, it’s important for all departments to be able to comprehend and share financial data. Decisions about recruiting and training workers are two ways in which human resources contributes to the company’s value creation. In order to make sure that HR follows all the rules and regulations and contributes to the company’s goals and objectives, HR finance is crucial.

Attracting top talent is another reason why HR needs a firm grasp of the company’s financials. Modern job candidates are savvy and do their research on a firm before committing to work there. The most desirable candidates may demand to review a company’s financial reports in order to assess how they compare to competitors when meeting with human resources to discuss possible employment.

Human Resources’ Potential Use of Financial Data

Every day, HR makes decisions that might help or hurt the company’s bottom line. Management and consultancy firm McKinsey has discovered that companies with efficient and quick-thinking HR are 20% more likely to have higher financial returns. Human resources can improve their decision-making with the use of financial data in several ways.

Developing a better financial plan: HR must comprehend the variables that affect revenue and expenses within the company. Because of this, they will be better able to make choices that advance the company’s long-term aims. When it comes to strategic business partnerships, HR departments that are able to make smarter decisions are priceless assets that help organizations achieve their goals more efficiently.

Organizational value creation: When human resources and finance work together, a business does better. By coordinating their efforts, the two divisions help the company as a whole get the most out of its employees. As an example, HR and finance can collaborate to develop a practical recruiting model that takes into account things like the company’s projected growth and how to maximize the effectiveness of recruitment and training while minimizing associated expenses.

Assessing available resources: If you want to know how healthy a company is financially, you should look at its financial statements. Human resources will be able to make better decisions about the distribution of resources and the implementation of initiatives that will propel the company closer to its objectives.

Project cost estimation: HR must determine whether projects and initiatives are worthwhile investments in order to manage human resources successfully. Prior to a project’s commencement or completion, HR can estimate profits by calculating ROIs using revenue and cost data from finance.

The HR financial groundwork

Human resources managers and staff should start their careers with a solid foundation in financial literacy and continue to hone their skills in this area.

Financial basics that any HR professional should be familiar with

Human resources should be familiar with these essential financial terms:

Payment systems that use debit and credit

In a double-entry bookkeeping system, the words “debit” and “credit” describe the financial transactions that take place. Any time you add money to an account, whether it’s for an expense or an asset, or take money out, it’s a debit. When you add a credit to an account, it raises the value of a liability or equity and lowers the value of an expense or asset. In a ledger, a debit goes on the left side and a credit goes on the right.

For instance, if a company buys a new $1,000 asset on credit, the money would be taken out of the equipment account (which is an asset) and put into the accounts payable account (which is a debt).

Transaction

Every time a company does anything that affects its bottom line, it is considered a transaction. It is common practice to record monetary transactions in the ledger. One component of a company’s financial statements is the wages payable account, which records the amount paid out for services done.

Maintain your account

To keep track of and organize monetary transactions, the financial ledger uses accounts as records. One common practice is to keep track of all monetary inflows and outflows into and out of a company’s cash account in a separate cash book.

Asset

An organization’s assets are anything that the corporation owns that has economic value, either now or in the future. Investments, machinery, tools, equipment, and patents are all examples of assets.

Liability

A liability is the present or future financial commitment of an organization to repay another entity. You owe money to other people or businesses; that’s what we mean when we talk about liabilities. Liabilities do not generate profits for a company. Debts owing to banks, taxes, and suppliers are all examples of liabilities.

Equity of the owner

The term “owner’s equity,” which is synonymous with “shareholder’s equity,” describes the financial stake that a business owner or shareholders would have in the company after paying off all debts and liquidating all assets. Shares of common and preferred stock, retained profits, and extra paid-in capital are all components of owner’s equity.

Revenue

A company’s revenue is the sum of all the money it makes from its main activities. Income can come from a variety of sources, including rent, dividends, interest, and even “counter revenue” from things like sales discounts and returns.

Costs

A corporation has to pay certain operational costs in order to make money. It means the flow of cash out of the business in exchange for goods or services going in. Rent, utilities, salaries, insurance, and COGS are all examples of expenditures.

Cash flow

The term “cash flow” describes the monetary inflow and outflow of a company over a given time frame. Expenditure of cash equals outgoing funds, whereas receipt of cash indicates incoming funds.

Liquidity

A company’s liquidity can be defined as its ability to satisfy its short-term obligations using its current liquid assets. Liquidity, in the context of finance, usually means the amount of cash on hand and the ease with which a company can turn its assets or securities into cash without affecting their market value.

Working capital

A company’s ability to satisfy its immediate and relatively short-term financial commitments is known as its working capital. The gap between short-term assets and short-term obligations is known as working capital in financial statements. A company’s working capital would be $1,100 if, for instance, it has $1,000 in the bank, $500 in cash, and $400 in pending accounts.

Human capital

Human capital is the monetary worth that an individual or team contributes to a company. It addresses their education, expertise, health, drive, and commitment. Skills in problem-solving, creativity, experience, and effective communication are all forms of human capital.

Figuring out what financial records mean

Human resources must be familiar with and competent with the organization’s financial accounts. One could make the case that human resource managers and leaders should be good businesspeople first and foremost. Reason being, these experts must be well-versed in the financial measurements that determine an organization’s revenue and expenses, as well as the myriad of factors that impact these metrics.

When human resources professionals have a firm grasp of financial statements, they will be better able to see how their choices affect the bottom line. With this information in hand, they will be better equipped to make significant contributions to the company and to serve as reliable counsel to its owners and decision-makers.

Improving the efficiency of a company’s human resources is one of the primary roles of a human resources manager. The ability to analyze their company’s financial situation and understand financial statements will greatly assist them in making decisions that boost cash flow and decrease expenses.

In addition, evaluating the worth of human capital and making informed outsourcing decisions also benefit from familiarity with financial statements. Having a well-informed HR financial team can do wonders for a company’s productivity, performance, and bottom line.

Making Sense of the Income Statement

If you want to know how well a business did financially over a certain time period, you should look at its income statement. It lays forth the income and expenditures that were considered while determining the profit or loss for a specific time frame.

In order to comprehend the company’s performance, human resources must be able to read and interpret the income statement. It also allows for the examination of potential value-added areas where HR may contribute to improving the company’s success.

Grasping the concept of the balance sheet

A balance sheet is an accounting document that summarizes the assets and liabilities of a business as of a certain date. The report details the equity and liabilities as well as the assets and sources of funding for the business. But you won’t find information on income or cash flow from operations on the balance sheet.

The balance sheet provides HR with a snapshot in time of the company’s financial health. They can utilize this data to make hiring and firing choices, as well as plan for the allocation and demands of the company’s resources in the short term.

Getting a handle on the cash flow report

You can see a rundown of all the money coming into and going out of your business in the cash flow statement. Over a certain time frame, the statement compiles information on the total amount of money that came into the firm, how much went out, and any investments or operations that brought in money from outside sources.

Human resources should regularly evaluate the cash flow statement to gain critical insights into the financial health of the organization. Additionally, they may use this statement to spot new or developing issues with resource allocation and gain insight into how to fix or prevent them.

Gaining insight into HR costs

You might think of costing as a method for allocating expenses to various parts of a company. Employees, clients, goods, channels of distribution, procedures, product lines, and even entire divisions can have their costs determined using costing in the financial sector.

The four main categories of expenses are direct, indirect, fixed, and variable. The HR costing process takes both the time and material costs into account. The whole cost, including fixed, variable, and opportunity costs, is another factor to think about.

In order to assess how much money is going out of each department and how that money is affecting the company’s overall objectives, HR experts employ costing. When looking at the income and cash flow statements line by line, HR can utilize costing to understand the company’s expenses and identify areas where they can minimize costs.

The HR budgeting process

A budget is a strategy for allocating a company’s financial resources. A budget describes the financial plan. An organization can better gauge its operational expenses in relation to its anticipated revenue by developing a spending plan.

Helping HR develop a strategy for resource stability requires a thorough understanding of the budget. Departmental resources can be more accurately estimated and distributed when future expenditures and revenues are known. In order to avoid over- or under-hiring, it also helps HR understand the staffing needs of the entire firm.

From human resources’ point of view, budgeting aids in projecting the number of employees the company needs or can afford, the expenses of benefits and salaries, and the rates and costs of turnover.

Important financial HR KPIs to think about

When utilized properly, these three financial HR metrics can contribute to a company’s success.

Cost per hire

An organization’s average expenditure on staffing is known as its cost per hire. When estimating or monitoring the expenditures associated with hiring new employees, this statistic is vital. If a business has $5,000 to spend on hiring 10 workers, then the cost per hire is $500.

Revenue per worker

It is possible to calculate a company’s revenue per employee by dividing its total revenue by the number of current workers. Human resources can use this ratio to get a better sense of how much money each person makes for the business.

The expense of training one employee

This is the ratio of an organization’s training expenditures as a percentage of its workforce. Training expenditures as allotted in the budget have an effect on employee retention and output.

Wrapping up

Financial and human resources departments work together to help the company reach its goals. Consequently, HR must be well-versed in financial matters. There is a great deal of upside for the company when HR is financially savvy, since their primary duties both cost money and bring in money, either directly or indirectly.

Have a quick question? We answered nearly 2000 FAQs.

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