TMA 2016_Financial Statements and People Strategy _Manning Final

Using Financial Statements to
Shape Your People Strategy
MICHA EL L MA NNING
P RINCIPA L MA NAG ER, HR
EDISO N INTERNATIO NA L
M I C H A E L . L . M A N N I N G @ S C E . C O M

“Imagine the power in your organization if
everyone understood the financial side of business
– worked in alignment with the strategy and goals
– worked as a team to achieve profitability”
Source: Financial Intelligence for HR Professionals, Karen
Berman and Joe Knight 2

Agenda
1. Financial statements and people interrelationship
2. Quick review of the basics in each financial statement
3. What is the near-term and longer-term story from the Balance
Sheet and Cash Flow
4. The 3 most common paths
3

Section 1 .
Financial
Statements
and
People
Interrelationship

Financial Statement and
People Interrelationships INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
+ Sources & Uses of Cash
= Cash from Ops
+/- Cash from Investing
+/- Cash from Financing
= Change in Cash
+ Beginning Cash Balance
= Cash & Cash Equivalent $83
BALANCE SHEET
Cash & Cash Equivalent $83
+ Other Assets
= Total Assets
Total Liability
= Total Owner' Equity $5,193
•Impacts sales/incomeStarts with the
Customer
Starts with the
Customer
•All 3 financials can be a source of
insight on:
•Which roles should be +/-
•Where additional skills are needed
Talent/People Strategy
Impacts
Talent/People Strategy
Impacts
•Impacts shareholder/owner equityEnds with the
Shareholder
Ends with the
Shareholder
5

Section 2.
Quick Review of
The Basics in
Each Financial
Statement
INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
= Cash from Ops
= Change in Cash
BALANCE SHEET
+ Other Assets
= Total Assets
Total Liability
IS THE COMPANY MAKING A
PROFIT?
HOW HAS CASH INCREASED OR
DECREASED THROUGH
OPERATIONS, INVESTING AND
FINANCING ACTIVITIES?
HOW EFFICIENTLY ARE ASSETS
BEING USED AND LIABILITIES
BEING MANAGED TO MAXIMIZE
PROFITS?

Income Statement Basics
(as a refresher)
Income statements show the
• Revenue
• Expenses;
• and Profits for a specific time period
There are many different names for an income statement, including:
• Profit and Loss Statement (P&L)
• Statement of Earnings
• Statement of Operations
INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
= Cash from Ops
= Change in Cash
BALANCE SHEET
+ Other Assets
= Total Assets
Total Liability
Revenue – Expense = Profit
7

Sample Company
Income Statement (in millions)
Sales $8,689
Cost of Goods Sold (COGS) 6,756
Gross profit $1,933
(SG&A) Selling, general, and admin. 1,061
Depreciation 239
Other income 19
EBIT (Earnings Before Interest and Taxes) $652
Interest expenses 191
Taxes 213
Net profit $248
1) Sales or revenue is
always at the top
3) and Profit is at the
bottom
2) Costs and expenses are
in the middle
No matter whose income statement you’re looking at,
there will be three main categories
Sample Financial
Source: Financial Intelligence, Harvard Business Press
INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
= Cash from Ops
= Change in Cash
BALANCE SHEET
+ Other Assets
= Total Assets
Total Liability
8

Statement of cash flows basics
The cash flow statement shows the cash moving
into a business, called the inflows,
and the cash moving out of a business, called the outflows.
The statement of cash flows is divided into three categories.
They show cash from or used in:
1. Operating activities,
2. Investing activities, (ex. new equipment)
3. Financing activities. (ex. issuing stocks & bonds, paying dividends)
INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
= Cash from Ops
= Change in Cash
BALANCE SHEET
+ Other Assets
= Total Assets
Total Liability
9

Cash Flow Statement
Net profit from the income statement
starts the cash flow statement
Sample Financial
INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
= Cash from Ops
= Change in Cash
BALANCE SHEET
+ Other Assets
= Total Assets
Total Liability
10

Balance Sheet Basics
The balance sheet reflects the assets, liabilities, and owners’ equity at a point in time
It shows, on a specific day, what the company owns (assets), what it owes (liabilities), and how
much its worth (equity)
The balance sheet is called such because it balances, assets must always equal liabilities plus
owners’ equity
Assets = liabilities + owners’ equity
INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
= Cash from Ops
= Change in Cash
BALANCE SHEET
+ Other Assets
= Total Assets
Total Liability
11

Cash Flow Statement
Balance Sheet
Sample Financial
Cash at End from the Cash Flow
statement starts the Balance Sheet
INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
= Cash from Ops
= Change in Cash
BALANCE SHEET
+ Other Assets
= Total Assets
Total Liability
12

Assets = liabilities +
owners’ equity
Balance Sheet
Sample Financial
INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
= Cash from Ops
= Change in Cash
BALANCE SHEET
+ Other Assets
= Total Assets
Total Liability
13

Section 3.
What is the
Near-term and
Longer-term Story
From the Balance
Sheet and Cash
Flow

Understanding the Story on Near-Term Talent Needs
Review multiple years of the Income Statement. Some talent questions to
consider:
• What positions impact items on the P&L?
• Is there high turnover?
• What skills are needed in those positions?
• Do we have the right amount of talent in those positions?
• HR programs and processes - are they a headwind or a tailwind?
15

What near term talent strategies will help your
company to better:
• Generate revenue
• Manage inventory
• Collect receivables
• Balance value and cost in your SG&A
Looking for ways to increase revenue or
reduce costs through people strategy will
help you with the question
“What is the ROI?”
16

Sample Company
Income Statement (in millions)
Sales $8,689
Cost of Goods Sold (COGS) 6,756
Gross profit $1,933
(SG&A) Selling, general, and admin. 1,061
Depreciation 239
Other income 19
EBIT (Earnings Before Interest and Taxes) $652
Interest expenses 191
Taxes 213
Net profit $248
Sample Financial
INCOME STATEMENT
Revenue $8,689
- COGS
= Gross Margin
- Operating Cost
= Operating Income
- Interest & Taxes
= Net Income $248
CASH FLOW STATEMENT
Net Income $248
= Cash from Ops
= Change in Cash
BALANCE SHEET
+ Other Assets
= Total Assets
Total Liability
17

Ratios
Data points from the financials can be combined to draw out further insight on people impacted
measures.
Some examples:
• Revenue per employee
• How many times you have turned over your inventory
• Average collection period (Days Sales Outstanding)
• Controllable O&M per customer
Find out which ones are important to your company and
consider how your talent strategy impacts them.
Financial Statements tell a story about a company’s strengths
and weaknesses but the story doesn’t jump off the page – you
have to dig, compare, and analyze to understand it
18

Understanding the story on longer term talent needs
For capital intensive businesses the balance sheet and cash flow statement can provide insight
on needed talent.
Ask: What is the
Macro
Story?
What is the
Sector
Story?
What is the
Company
Story?
19

What is the Company Story
Review multiple years of the balance sheet.
Ask 3 questions
1. Where are we building assets into the operation? (short term and long term)
2. What is the pattern of asset growth?
3. What is the people implication of this?
A segmented balance sheet is a balance sheet that is broken apart by company function
and will provide additional insight when reviewed with the three questions in mind.
The budgeted balance sheet is a projection of what the balance sheet will look like
during future budget periods and can provide a forward looking view.
What is the
Macro Story?
What is the
Sector Story?
What is
the
Company
Story?
20

What is the Sector Story
Review balance sheets from other companies in your sector
Ask:
1. Are others in the sector facing the same pressures?
2. If so how they are responding with their asset investment?
3. Is the sector seeing any patterns of asset acquisitions or divestitures?
May also want to look geographically
What is the
Macro Story?
What is
the Sector
Story?
What is the
Company
Story?
21

What is the Macro Story
What is going on in the larger business environment and economy?
Look at investing section in the cash flow statements of your company and
others companies in your sector.
1. Are they supporting your industry and sector story from the balance sheets?
2. Are there events on the horizon that may impact these such as interest rate hikes,
technology shifts,…. ?
3. How might the possible changes influence your people strategy?
What is
the Macro
Story?
What is the
Sector Story?
What is the
Company
Story?
22

Cash Flow Statement Balance Sheet
Sample Financial
Source: Financial Intelligence, Harvard Business Press 23

Section 4.
The Three Most
Common Paths

The Three Most Common Paths – Path One
Increase Profitable Sales
• Find new
markets
• Find new
prospects
• HR can focus
on recruitment
and
development
of sales people
• Requires a
good deal of
time
• Work
through the
sales cycle
ProfitableSalesProfitableSales
TimeConsumingTimeConsuming

The Three Most Common Paths – Path Two
Find Efficiencies
• Lower
production
costs i.e.
Reduce Costs
of Goods Sold
• HR participates
in the process
improvement
efforts
• Also requires a
good deal of
time
• Study
production
process
• Find
inefficiencies
• Implement
changes
RunmoreefficientlyRunmoreefficiently
TimeConsumingTimeConsuming

The Three Most Common Paths – Path Three
Cut Operating Expenses
• HR supports
reduction in
workforce
• Short-term
solution
• Layoffs can
backfire
• Lose top talent
through attrition
• Employee
engagement and
morale goes
down
• Processes and
service can
suffer
IncreaseRevenueIncreaseRevenue
ReduceHeadcountReduceHeadcount
“A financially
intelligent HR
Manager can mediate
the battle between
short-term thinkers
who want to cut costs
by losing people and
those who focus on
people’s intrinsic value
over time (long-term
thinkers)” – Karen
Berman + Joe Knight

TMA 2016_Financial Statements and People Strategy _Manning Final

TMA 2016_Financial Statements and People Strategy _Manning Final

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