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The Knowledge

The idea that HR practitioners struggle with the numbers has been shown time and again to be an inaccurate stereotype. But it is true that the requirement for senior professionals outside the financial department to be able to understand profile and loss (P&L) accounts or read a balance sheet has never been greater. Rana Ghandour Salhab, Middle East talent and communications partner at Deloitte, says: “The 21st-century talent environment demands of HR professionals a clear understanding of how to use all kinds of data, including financial data.” By achieving this, she says, HR has the opportunity to become a “business-aligned trusted adviser and solutions provider”. Christine Wright, managing director of Hays in Asia, adds: “Increasingly, in most major organisations, the HR director and CFO are working closer together than ever and the more you can enhance your relationships between the teams, the more effective you can be in your role.”

There are three main areas to consider. basis. It will also give a turnover figure, The balance sheet gives a snapshot of the which is the value of the company’s business’s total assets sales. When you take and liabilities at any away the cost of the given time. It might sales, you get gross include: cash available profit, which can be in bank accounts, debts You should be able to correctly compared over time. answer more than one of the not yet collected, stock Meanwhile, the questions below, according to or production costs cashflow statement Standard & Poor’s for unsold products, is often the most 1. You have $100 in a savings account and fixed assets (property, crucial information the bank adds 10 per cent a year to the plant and equipment), of all. It summarises account. How much money would you accrued liabilities the business’s cash have in the account after five years if you did not remove any money from (unpaid expenses) and inflows and outflows the account? shareholder capital. over a given period, a. More than $150 The balance sheet also certainly for the b. Exactly $150 shows the net asset trading year but c. Less than $150 value of the company – also often monthly. 2. You put money in the bank for two the total assets less total years and the bank agrees to add 15 per Reliable forecasting of liabilities. cash movement and cent a year to your account. Will the bank add more money to your account in the The P&L statement availability is essential second year than it did in the first year, or is about performance to ensure suppliers, will it add the same amount in both years? – how much revenue employees and other a. More the business made creditors can be paid. b. The same over a period, the “If you are looking 3. Is it safer to put your money into: costs accrued and, at stability, you will go a. One business or investment ultimately, the profit. to the balance sheet. b. Multiple businesses or investments It lists sales revenue If you want to assess and expenses that performance, then determine the profit (or loss) on a it’s the P&L,” says Wright. But if you monthly, quarterly, bi-annual or annual haven’t got cash, very little else matters. While no HR professional is likely to match the skills of an accountant, Narayanan Vaidyanathan, an Association of Chartered Certified Accountants senior manager, says it’s important for HR to broadly understand the bottom line: “Company Sales The total amount brought in by balance sheets and P&L statements, goods or services in the period used in conjunction with each other and Cost of sales The materials and labour interpreted correctly, will give a solid required to achieve those sales overview of the company’s financial performance. It’s important that HR Overheads These could include admin, professionals understand the link R&D, marketing and support functions between financial performance and Operating (pre-tax) profit business viability.” The amount made from core activities – often reported in This can begin with your own area of the press simply as ‘profit’ the business, Wright adds. By applying the principles of P&L to HR’s own Profit after tax The most interesting figure for budgets, you can understand where you shareholders, as it gives the are deriving value, whether you are a fullest picture of profitability profitable department – and you might just turn up some unexpected outflows that need clamping down on…

Are you financially literate?

Answers 1 a, 2 a, 3 b

4

Read the company budget

Making sense of P&L accounts

People Management Middle East

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People Management Middle East: Issue 2  

The CIPD magazine for the Middle East