Why Should Human Resources Use Financial Planning?

Why Should Human Resources Use Financial Planning?

By Karl Kern, Accountant / Lecturer / Writer

Businesses exist in order to improve the well-being of others.  One approach businesses use for achieving this goal is the concept of people/process/technology.  In businesses the element of people is the responsibility of human resources; human resources is responsible for the acquisition, compensation, and teaching of people.  How can human resources improve its ability to acquire, compensate, and teach people?  An answer is financial planning, thinking about how businesses can accumulate wealth.

The Visualization of Financial Planning

Financial planning can be seen through the following illustration:

To achieve greater clarity I am going to reorganize the illustration in the following manner:

Using the Visualization

We will use the pyramid in a company I was introduced to several years ago and has stuck in my mind.  The company is an equipment manufacturer.  A reason the company has stuck in my mind is its value proposition: same day, next day.  If someone orders equipment from this company, the company pledges to ship the order the same day or the next day.  Fulfilling this pledge can be a challenge however the challenge can be managed by financial planning and we will manage the challenge by using the visualization.

Wealth

Q: Why is wealth at the top of the pyramid?
A: Wealth is the pinnacle for human resources.

Wealth is the pinnacle for human resources because if it doesn’t accumulate wealth, it will cease to exist.  For the manufacturing company we are using in this article it will cease to exist when it fails to fulfill its pledge of shipping products on the day they were ordered or the day after they were ordered.  Fulfilling this pledge, the ultimate wealth of this company, is accomplished by the union of production, selling, and administration.  Human resources, an element of administration, is responsible for supporting production, selling, and other departments in administration.  Human resources provides support by acquiring, compensating, and teaching people.  This form of support is measured by the wealth it accumulates.  What is the wealth it accumulates?

The wealth human resources accumulates for the manufacturing company is the people who fulfill the company’s same day, next day pledge.  People who are able to fulfill this pledge have characteristics – e.g. creativity, commitment, and curiosity – that human resources can accumulate through its role.  Let’s see how human resources can accumulate wealth for this company through its role.

  1. Acquisition: Is human resources supporting other functions in the company through the acquisition of people who can fulfill the company’s pledge?
  2. Compensation: Is human resources supporting other functions in the company through the compensation of people who can fulfill the company’s pledge?
  3. Teaching: Is human resources supporting other functions in the company through the teaching of people who can fulfill the company’s pledge?

The answers to these questions come from financial planning.  By using the financial planning pyramid human resources can think about how it accumulates wealth from the acquisition, compensation, and teaching of people.  The accumulation of wealth does not come from nowhere, the accumulation of wealth comes from the transactions that occur from the role of human resources.  Let’s examine the role of human resources in terms of transactions.  

Transactions

Q: Why are transactions in the middle of the pyramid?
A: Transactions are the connection from choices to wealth.

The wealth accumulated from human resources for this company, people who can fulfill the company’s pledge, arise from transactions.  Transactions due to the support of human resources exist in two forms. The first form is cash receipts.  Cash receipts will be from customers who purchase what the company manufacturers not because of the products itself but the products that can be delivered on the day they were ordered or the day after they were ordered.  The second form is cash disbursements.  One type of cash disbursements applies to what is needed in order to fulfill the company’s pledge.  Another type of cash disbursements applies to the acquisition, compensation, and teaching of people.

Cash disbursements applicable to the acquisition, compensation, and teaching of people reside in human resources; human resources must think about how it will spend money to

  1. Acquire people who can fulfill the company’s pledge,
  2. Compensate people who can fulfill the company’s pledge, and
  3. Teach people who can fulfill the company’s pledge.

The transactions from human resources must have a two-fold purpose.  The two-fold purpose is to increase cash receipts and decrease cash disbursements.  Increasing cash receipts and decreasing cash disbursements reflect the quality of the company’s pledge from the eyes of its stakeholders.  Stakeholders – customers, employees, lenders, service providers, stockholders, and suppliers – will recognize the quality of the company’s pledge by how human resources acquires, compensates, and teaches people.  Human resources therefore must think about how its transactions in the form of cash disbursements can project the quality of the company’s pledge.

Here are some examples of how human resources, through its transactions, can project the quality of the company’s pledge: 

  • Paying employees through salaries, wages, commissions, and bonuses in ways that allow the company to fulfill its pledge.
  • Paying for benefits like 401k plans and insurance that support the effort of people in production, selling, and other administrative functions in ways that allow the company to fulfill its pledge.
  • Paying outside consultants for teaching programs intended to improve the ability of people in the company to fulfill its pledge.
  • Purchasing materials for education on sexual harassment that is intended to improve the environment of the workplace but has an extended purpose which is the prevention of expenses incurred from lawsuits that can hinder the ability of the company to fulfill its pledge.
  • Paying for the recruitment of technologists who can contribute to the business as a whole by their selections of technology that helps the company fulfill its pledge.

Transactions from human resources do not arise from nowhere, transactions from human resources arise from the choices it makes.  Thinking about the transactions that arise from choices is best managed by financial planning.  Let’s examine how financial planning can be used to help human resources make the appropriate choices.

Choices

Q: Why are choices at the bottom of the pyramid?
A: Choices are the foundation for accumulating wealth.

Human resources has many choices in its role and here are some examples:

  • Should human resources acquire people from newspaper advertisements, online services, or recruiting firms?
  • Should human resources compensate people through salaries or wages?
  • Should human resources compensate people through commissions and/or bonuses?
  • Should human resources compensate people through benefits like 401k and insurance plans?
  • Should human resources teach people through the use of consultants or its own staff?
  • Should human resources teach people through materials or online training?

The answers to these and other questions are determined by the value propositions of businesses; for the company in our case study the value proposition is its same day, next day pledge.  The choices made by human resources must be based on value propositions like same day, next day because the choices flow not only inside but also outside the company.  The flow inside the company is the work of production, selling, and other administrative functions engaged in fulfilling the company’s pledge.  The flow outside the company is the perception of the company’s value proposition from stakeholders like customers, lenders, service providers, stockholders, and suppliers.  How human resources can manage the flow is financial planning.

What financial planning can do is organize the thinking of how human resources can acquire, compensate, and teach people.  Organizing the thoughts of acquisition, compensation, and teaching can improve the role of human resources in a very important way.  The importance is the ability of human resources to support the company’s effort in improving the wellbeing of others.  The company’s ability to not only maintain but also thrive in its environment only occurs when it is seen as improving the well-being of others.  Improving the wellbeing of others does not come from nowhere, improving the wellbeing of others comes from the

  1. Choices the company makes,
  2. Transactions the company initiates, and
  3. Wealth the company accumulates.

Improving the well-being of others is not the exclusive domain of businesses.  Functions like production, selling, and administration exist due to its ability to improve the well-being of others.  For human resources its ability to improve the well-being of others exists in the ability to support production, selling, and other administrative functions.  Support from human resources – acquisition, compensation, and teaching – can be a challenge however the challenge can be managed.  How human resources can manage this challenge is through the use of the financial planning pyramid.

Conclusion

Wealth, the abundance of valuable possessions, is not limited to items on financial statements.  The wealth of businesses includes the people employed in production, selling, and administration.  Human resources is the role in businesses that helps these functions employ people in a manner that accumulates wealth.  Accumulating wealth is a task suited for financial planning.  As a result the reason human resources should use financial planning is to think about how

  1. Choices affect the
  2. Transactions that link their choices to the
  3. Wealth that benefits the stakeholders of businesses.
     
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