Successfully reported this slideshow.

Cash Flow Analysis In Strategic Human Resources Management


Published on

Cash flow analysis can help when making your strategic HR decisions

Published in: Business, Technology
  • Be the first to comment

Cash Flow Analysis In Strategic Human Resources Management

  1. 1. Cash Flow Analysis in Strategic Human Resources Management The critical relationship between strategic human resources planning, project life cycle, and financial measurements. The Rapid Learning Institute
  2. 2. How to build a cash flow for strategic human resources planning <ul><li>Think in terms of when your company gets cash in and when do we have to pay the cash out. </li></ul><ul><li>That’s how you begin to build the cash flow statement in your strategic human resources planning process </li></ul>The Rapid Learning Institute
  3. 3. Profit and cash flow are not the same <ul><li>Profit- revenue minus cost. It's the bottom line. It's also referred to as net income or net earnings. </li></ul><ul><ul><li>As a percentage, it's called the profit margin. </li></ul></ul><ul><ul><ul><li>Net profit margin is profit after all costs (fixed, one off, and cost of sales) </li></ul></ul></ul><ul><ul><ul><li>Gross profit margin covers only the cost of sales. </li></ul></ul></ul><ul><li>Cash flow-cash (revenue) generated by your operations (key business activity) with adjustments for liabilities, receivables, and deprecation </li></ul>The Rapid Learning Institute
  4. 4. Profit is not equal to cash <ul><li>Why? </li></ul><ul><ul><li>Depreciation, which spreads the cost of an asset over a time period, is counted towards profitability. You don't actually pay that out to anyone. </li></ul></ul><ul><ul><li>Cash only comes in when payment comes in. Y ou might sell an item and have revenue today, you may not receive the payment for another 30 days </li></ul></ul>The Rapid Learning Institute
  5. 5. Strategic human resources decisions need to be made on a level plane <ul><li>Discounted cash flow analysis levels the plane. This formula works out revenue in the future and says, what is that revenue worth to us today? </li></ul><ul><li>You want to always be comparing dollars in the same time frame </li></ul><ul><ul><li>The interest rate that you use has a significant impact those present value dollars are, the higher the interest rate, the lower the present value is going to be. </li></ul></ul>The Rapid Learning Institute
  6. 6. Hurdle Rate in Strategic Human Resources Management <ul><li>The hurdle rate is your company’s cost of capital </li></ul><ul><li>You use the company’s cost of capital or “hurdle rate” as the interest rate in your discounted cash flow calculations </li></ul><ul><li>Use that same hurdle rate or cost of capital when you calculate the present value for your ROI analysis whether it involves purchasing capital or not. </li></ul>The Rapid Learning Institute
  7. 7. Inflow versus the Outflow <ul><li>The revenue collected(inflow) less the expenses(outflow) that are being generated or paid out by the business. </li></ul><ul><li>This is really a balance and timing issue. </li></ul><ul><li>For example, you may buy materials right now but we might not pay for them for another 30 days. You may incur labor costs today but you don't actually pay the money out for two weeks </li></ul>The Rapid Learning Institute
  8. 8. Cash flow measures the company’s health <ul><li>It’s a key decision criteria in strategic human resources planning and allocation </li></ul><ul><li>When calculating ROI, we're trying to say, “Fund my project. My project is the one that will provide the greatest benefits to company.” </li></ul><ul><li>When calculating the cash flow, we’re saying, “This is when we will see the cash from the project.” </li></ul><ul><li>Keep in mind only cash can be spent. Profits are important - look at the actual cash flow when making the decision. </li></ul><ul><li>CASH FLOW IS THE CASH YOU HAVE TODAY </li></ul>The Rapid Learning Institute
  9. 9. A cash flow to profit comparison in strategic human resources planning <ul><li>Here is an income statement for a company at the end of December. They have revenues of $150,000. They had expenses-materials and salaries of $120,000. They show a profit of $30,000. From a cash flow standpoint, they haven't actually been paid for the $150,000 worth of sales. So, they extended credit terms. </li></ul><ul><li>They had to pay for their raw materials. They had to pay their employees. There was a cash outflow for the total amount of the expenses of $120,000, which means from a cash flow standpoint, they're short by $120,000. </li></ul><ul><li>  </li></ul><ul><li>In 30 or 60 or 90 days from now when that cash comes in, that will balance out. But it's important to keep in mind that cash and profit are different. And we're going to be looking specifically at cash flow. </li></ul><ul><li>Income Statement 12-31-09 </li></ul><ul><li>Ops Revenue +150,000 </li></ul><ul><li>Expenses -120,000 </li></ul><ul><li>Profit =30,000 </li></ul><ul><li>Cash Flow 12-31-09 </li></ul><ul><li>Expenses(due now) -120,000 </li></ul><ul><li>Revenue due 3-31-10 150,000 </li></ul><ul><li>-120,000 cash flow for 12-31-09 </li></ul>The Rapid Learning Institute