tma 2016_financial statements and people strategy _manning final

Using Financial Statements to Shape Your People Strategy

M I C H A E L L M A N N I N G

P R I N C I PA L M A N A G E R , H R

E D I S O N I N T E R N AT I O N A 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 STATEMENTNet 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 SHEETCash & 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 STATEMENTRevenue $8,689

- COGS

= Gross Margin

- Operating Cost

= Operating Income

- Interest & Taxes

= Net Income $248



= Cash from Ops



= Change in Cash




+ 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


- COGS

= Gross Margin

- Operating Cost

= Operating Income

- Interest & Taxes

= Net Income $248



= Cash from Ops



= Change in Cash




+ 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


- COGS

= Gross Margin

- Operating Cost

= Operating Income

- Interest & Taxes

= Net Income $248



= Cash from Ops



= Change in Cash




+ Other Assets

= Total Assets

Total Liability


8

Statement of cash flows basicsThe 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)


- COGS

= Gross Margin

- Operating Cost

= Operating Income

- Interest & Taxes

= Net Income $248



= Cash from Ops



= Change in Cash




+ Other Assets

= Total Assets

Total Liability


9

Cash Flow StatementNet profit from the income statement

starts the cash flow statement

Sample Financial



- COGS

= Gross Margin

- Operating Cost

= Operating Income

- Interest & Taxes

= Net Income $248



= Cash from Ops



= Change in Cash




+ Other Assets

= Total Assets

Total Liability


10

Balance Sheet BasicsThe 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


- COGS

= Gross Margin

- Operating Cost

= Operating Income

- Interest & Taxes

= Net Income $248



= Cash from Ops



= Change in Cash




+ 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


- COGS

= Gross Margin

- Operating Cost

= Operating Income

- Interest & Taxes

= Net Income $248



= Cash from Ops



= Change in Cash




+ Other Assets

= Total Assets

Total Liability


12

Assets = liabilities + owners’ equity

Balance Sheet

Sample Financial



- COGS

= Gross Margin

- Operating Cost

= Operating Income

- Interest & Taxes

= Net Income $248



= Cash from Ops



= Change in Cash




+ 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



- COGS

= Gross Margin

- Operating Cost

= Operating Income

- Interest & Taxes

= Net Income $248



= Cash from Ops



= Change in Cash




+ Other Assets

= Total Assets

Total Liability


17

RatiosData 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 needsFor 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 StoryReview 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

Company Story?

20

What is the Sector StoryReview 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 StoryWhat 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 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 OneIncrease 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

Pro

fita

ble

Sa

les

Pro

fita

ble

Sa

les

Tim

e C

on

sum

ing

Tim

e C

on

sum

ing



The Three Most Common Paths – Path TwoFind 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

Ru

n m

ore

eff

icie

ntl

yR

un

mo

re e

ffic

ien

tly

Tim

e C

on

sum

ing

Tim

e C

on

sum

ing



The Three Most Common Paths – Path ThreeCut 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

Incr

ea

se R

eve

nu

eIn

cre

ase

Re

ven

ue

Re

du

ce H

ea

dco

un

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ed

uce

He

ad

cou

nt

“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

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