1. Running head: HR FINANCE 1
The Challenges of Capitalizing on Human Resource Management
Amy K. Knight
Concordia University, St. Paul, HRG 560
Professor Phillip Hampton
February 4, 2017

2. HR FINANCE 2
Abstract
The goal of business is typically to make money. There are aspects of a business that directly
impact an organization’s effectiveness in bringing in revenue. Customer service efficiency,
supply and logistics, and sales are a few areas where analyzing the monetary impact that these
areas have on an organization is relatively straight forward. Although Human Resources, or lack
thereof, has a significant impact on the success of an organization, it is often difficult to know
how to measure the extent by which Human Resources impacts the bottom line. By assessing
the ways in which Human Resources is responsible for managing the overall effectiveness of the
human capital within the organization, it becomes clearer how Human Resources is instrumental
in the endeavor of increasing revenue. The key to this process is to begin to think numerically
by utilizing metrics that help place a dollar value on issues such as turnover, labor cost, training,
and recruiting so that decision makers can be confident in determining which Human Resources’
initiatives will positively impact the financial state of the organization. Doing so not only helps
decision makers know which direction to take the organization, but also assists in making the
most of an often-underutilized resource, namely its Human Resources.
Keywords: analytics, capital budgeting, finance, human capital, human resources, metrics

3. HR FINANCE 3
Human capital is a contributing factor when it comes to determining an organizations
financial effectiveness. Human Resources (HR) is entrusted with the responsibility of managing
an organization’s human capital. With that comes the responsibility of spearheading initiatives
relating to hiring, training, and retention. The problem is that these aspects of the business cost
money. Exhibiting how certain choices regarding these HR initiatives can provide a return on
investment is essential to ensuring that those initiatives receive adequate funding. To do that HR
managers must learn what metrics to rely upon and how to speak the language of finance.
Human Resources has been traditionally viewed as an expense incurred by the
organization, a necessary evil so to speak. However, the decisions that HR makes has a direct
impact on the overall success, or failure, of the human capital within the organization. The
problem lies in determining how to correlate the relationship between human resources and the
financial status of the organization. This is not an easy task. There are no sure-fire tools
available to measure HR’s effect on finance. Ladislav Sojka eloquently states, “If we accept the
assumption confirmed by several previous studies that human resources are the company’s most
important asset, then it is necessary to examine what is their true effect on the economic
performance of the firm” (2015, p. 88). Incorporating the appropriate metrics that measure HR
initiatives will get us closer to that goal.
Ratio metrics for HR management include formulas for determining things like revenue
to full time employees, turnover, operating expense to employee count, and personnel cost
compared to the revenue coming into the organization. Determining employee cost versus
revenue coming into the organization can be a starting point to gauging how human capital can
be translated into numbers for the organization. From there, decision makers can drill down to
factor in what aspects of expenses may be contributing directly to those costs. Once the cost per

4. HR FINANCE 4
employee is established, then the next step may be to examine how the human capital drives
revenue.
Determining how the human capital of an organization drives revenue is complex. There
are many factors that play a role in an organization’s success that are difficult to monetize, such
as soft skills and cultural fit, for example. Excelling in these areas can certainly contribute to an
organization’s competitive advantage. Ascertaining the extent to which they do so will help HR
in the undertaking of creating value added initiatives. One way to consider tackling this effort is
to consider looking at it another way. For example, soft skills are defined as “interpersonal,
human behavior, and leadership skills, often complement other characteristics and prompt
understanding individual job performance” (Mathis, Jackson, & Valentine, 2014, p. 250). By
dissecting the elements of performance that enhance the customer experience thereby increasing
revenue, one can then define that soft skill as a resource. Once it is determined which resources
(soft skills) are most valuable to the organization by producing the most desired impact, namely
increased revenue, then they become tangible and can be measured.
Providing an example will help to examine this idea of measuring soft skills in order to
place a monetary value on them. It has been determined that organization Z’s highest producers
who bring in the most revenue are individuals who are self-motivated. The organization has
discovered that these employees on average are within the top ten percent of its annual revenue
producers. Not only do they tend to be the highest producers, but HR has discovered that they
also have the lowest turnover. With this discovery, the organization has gathered that self-
motivation is a resource that they’d like to be able to continue to obtain and retain. By
conducting an analysis to determine that self-motivation is a viable resource for the organization,

5. HR FINANCE 5
they are now able to focus their efforts on recruiting and training initiatives that will capitalize on
the accumulation of this resource.
Effectively utilizing analytics in business starts with a mindful reset on the part of HR to
think in terms of how what they do impacts the organization financially. It is necessary to think
in terms of monetary value. To provide an example of a real company dealing with this issue,
PRIDE Industries, a non-profit with a mission of creating jobs for people with disabilities, has
employees who stock shelves in a grocery store. To meet maximum productivity, they must
stock no less than 30 cases an hour. If an employee stocks less than that, then the company does
not make any money and may in fact lose money. It is up to the HR professional supporting the
site where the stocking occurs to come up with ways to motivate the employees to be better
producers so that they can meet the minimum requirement of 30 cases stocked per hour. Unless
that HR professional understands the detrimental financial impact that the lower productivity has
on the organization, he/she may not be thoroughly invested to come up with a feasible solution.
Analytics help to illustrate HR’s value within the organization. Kapoor and Kabra define
HR analytics as “the integration of relevant HR data from different sources, the performing of
organizational and workforce analysis on this captured data, and ultimately the gleaning of
insights from the findings to shape decisions for better organization performance” (2014, p. 50).
Analysis can be used to determine past trends and drive desirable results moving forward. By
incorporating analytics and capital budgeting, which is the process of evaluating a budget
proposal, one can begin to understand the value that an initiative may bring. To adequately
demonstrate cost savings or return on investment potential, HR must be able to conduct and
provide a sensitivity analysis. A sensitivity analysis consists of best, most likely, and worst case
scenarios as a result of the initiative (P. Hampton, personal communication, January 24, 2017). It

6. HR FINANCE 6
is then that an HR professional can demonstrate that he/she understands the language of finance
and the role that HR plays in driving revenue.
Although determining how HR impacts an organization financially is a complex
endeavor, it is not impossible. HR must be a strategic partner that aligns its departmental values
with the organization. Steven Director notes that “HR strategy including employee selection and
employee compensation should be tailored to support the firm’s business strategy” (2013, p. 57).
Understanding the value of human capital within the organization and how to translate it in a
way that allows it to be measurable is an essential component to being able to demonstrate the
return on investment of HR initiatives. Once that is established, HR can then conduct and
present a sensitivity analysis to the decision makers. By following these key steps, HR has a
better chance of optimizing its efforts towards providing a greater return on investment for the
organization.

7. HR FINANCE 7
References
About PRIDE. (2017). Retrieved from http://prideindustries.com/about/
Director, S. (2013). Financial Analysis for HR Managers: Tools for Linking HR Strategy to
Business Strategy. Upper Saddle River, NJ: Pearson Education, Inc.
Kapoor, B., & Kabra, Y. (2014). Current and Future Trends in Human Resources Analytics
Adoption. Journal of Cases on Information Technology, 16(1), 50-59.
Mathis, R. L., Jackson, J. H., & Valentine, S.R. (2014). Human Resource Management (14th ed.).
Stamford, CT: Cengage Learning.
Sojka, L. (2015). Investigation the Relationship Between Human Resource Management
Practices and Firm's Finance Performance. European Scientific Journal, 11(34), 87-105.
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