This chapter is from the book
This chapter is from the book
This chapter is from the book
What This Book Attempts to Do
When should financial analyses precede HR decisions? The answer to that question is always. That doesn’t mean that in all cases you need to develop spreadsheet models and utilize their built-in financial functions. That may be necessary when decisions involve many factors or substantial amounts of money. However, even in situations in which no formal modeling is warranted, you need to consider the potential financial implications of your recommendations and actions. To do that requires an understanding of and appreciation for the importance of the following:
- Basic financial concepts such as the difference between profit and cash flow
- Difference between the market value and the book value of a company
- Cost of capital
- Time value of money
- Return on investment
- Risk reward trade-offs
- Risk management tools such as diversification and real options
Most of these concepts are just as relevant for your personal decision making as for your decisions at work. HR managers also need to understand the strengths and weaknesses of the various financial performance measures used to assess how well a company is doing and as a basis for allocating incentive pay.
This book provides you with an intuitive understanding of each of these topics. Algebraic notation and equations are avoided, and these concepts are illustrated using spreadsheet examples. Not all HR managers are comfortable with algebraic notation, and in any case spreadsheets are the format in which they are most likely to encounter these concepts on the job. Where appropriate the keystrokes for utilizing Microsoft Excel’s built-in financial functions are provided and discussed. This book does not attempt to include an introduction to the HR strategy or to corporate compensation policies. There are excellent volumes devoted to these topics.3 What it does attempt to do is provide HR managers with an understanding of the financial jargon and methods often central to strategy development and compensation policy.
Chapter 2 (“The Income Statement: Do We Care About More Than the Bottom Line?”), Chapter 3 (“The Balance Sheet: If Your People Are Your Most Important Asset, Where Do They Show Up on the Balance Sheet?”), and Chapter 4 (“Cash Flows: Timing Is Everything”) use data from the annual reports of Home Depot, Inc., to review the interpretation of corporate income statements, balance sheets, and cash flow statements. If you are familiar with the interpretation of basic financial statements and the differences between profit and cash flow, you may want to skip over these chapters. Chapter 5 (“Financial Statements as a Window into Business Strategy”) provides a case study on using financial statements to gain insights into a firm’s business strategy. Chapter 6 (“Stocks, Bonds, and the Weighted Average Cost of Capital”) and Chapter 7 (“Capital Budgeting and Discounted Cash Flow Analysis”) discuss the concepts of cost of capital and time value of money. Chapter 8 (“Financial Analysis of Human Resource Initiatives”) uses these concepts to look at resource allocation within the HR function. Chapter 9 (“Financial Analysis of Corporation’s Strategic Initiatives”) begins with the premise that if HR managers are going to be true strategic partners they must understand the financial models used to develop and evaluate corporate strategy. These techniques are discussed in spreadsheet illustrations. Chapter 10 (“Equity-Based Compensation: Stock and Stock Options”) looks at equity pay and the implications of paying in stock versus paying in stock by stock options. Pensions are of enormous financial significance to the U.S. economy and to most large corporations, and they are the subject of Chapter 11 (“Financial Aspects of Pension and Retirement Programs”). The chapter includes a discussion of the way pension accounting choices can affect the company’s bottom line profit. Chapter 12 (“Creating Value and Rewarding Value Creation”) attempts to pull all these concepts together to look at the conditions under which shareholder value is created and at the strengths and weaknesses of alternative measures of value creation. These topics are discussed within the context of incentive pay and the choice of performance metrics that encourage the development and execution of strategies that create long-term value for the firm and its stakeholders.