Key highlights
- HR decisions on a daily basis can either help or harm the organization’s financial performance and financial awareness has become a critical requirement for HR professionals in most modern businesses.
- To achieve the company’s objectives, the HR and finance departments must work together, as organizations with an effective HR are twice as likely to achieve 20% higher financial returns.
- HR should use financial data to make better decisions to improve financial strategy, create value across the organization, perform resource analysis, estimate the financial impact of projects
HR decisions on a daily basis can either help or harm the organization’s financial performance and financial awareness has become a critical requirement for HR professionals in most modern businesses.
According to recent research by management and consulting firm McKinsey, organizations with effective HR are twice as likely to achieve 20% higher financial returns.
As finance department’s primary responsibility is to allocate and monitor resources that support the organization’s goals while maintaining a balance of revenue and costs. HR, on the other hand, is in charge of recruiting, motivating, and managing the people who help with those goals. To achieve the company’s objectives, the HR and finance departments must work together.
Why does HR need to know finance?
Labor costs such as salaries, benefits, and related taxes can account for up to 70% of a company’s total operating costs. As a result, in most businesses, planning and budgeting begin with HR.
HR professionals must, therefore, be knowledgeable about budget preparation and management for all departments within the company. In most modern businesses, financial awareness is a must for HR professionals. To make a difference as strategic partners in the planning and management of a large organization, they must understand finance and accounting.
Here are some examples of why HR should use financial data in an organization:
- Improving financial strategy: HR departments that make better decisions are invaluable strategic business partners, assisting the organization in achieving its goals more efficiently. Human resources must comprehend the factors that influence costs and revenue in their organization will assist them in making decisions that promote the overall goals and objectives of the company.
- Creating value across the organization: When HR and finance work together effectively, a company performs better. When both departments collaborate, the organization as a whole will maximize the returns on its people. For example, HR can collaborate with finance to develop a working hiring model that takes into account scenarios such as the company’s projected growth and optimizing recruitment and training costs.
- Performing resource analysis: When analyzing and interpreting an organization’s financial health, its financial statements come in handy. HR can make more informed decisions about how and where to allocate resources, as well as which strategies work best to move the organization closer to its objectives.
- Estimating the financial impact of projects: HR must decide which initiatives and projects are worthwhile investments and which ones are not in order to manage a company’s human resources effectively. Even before the business begins or completes a project, HR can estimate profits by calculating the ROIs of those projects using cost and revenue data from finance.
