The Basics of Finance-Speak

To implement an effective compensation and benefits program, you need to speak the language of the CFO, and it can be daunting. Perceptions sometimes block understanding, says Clare Novak, president of Novak and Associates. We think “I can’t do this” or “This is boring,” and we get in our own way. But you can do it.

Novak, who is an award-winning international consultant and author of Never Rule Without a Magician, a Sage, and a Fool, shared some tips on decoding finance-speak in a recent BLR® webinar.

Some of the Basics

Understand that it’s the CFO who is expected to know (really know) about finance. The good news in HR, says Novak, is that we don’t need to know all the dots and details of finance, just enough to understand how money flows and to ask informed questions when necessary.

Here are some of the absolute basic terms Novak advises HR pros to be aware of:

• Income
• Assets
• Expenses
• Liabilities
• Taxes

At the end of the day, what must happen with these variables in order to stay in business? As you can most likely guess, you must have more income and assets than you have expenses, liabilities, and taxes. If your company bumps around breaking even, it’s not going to stay in business long, explains Novak. It’s straightforward—we have to make more money than we spend.

Try BLR’s all-in-one compensation website, Compensation.BLR.com®, and get a complimentary special report, Top 100 FLSA Overtime Q&As, no matter what you decide.   Find out more.

The ‘Plus’ Side of the Ledger

• Gross Income (a.k.a. Gross Profit). This is defined as revenues minus cost of goods sold (i.e., materials), says Novak. While the cost of goods is factored in, this does NOT take into account all expenses.
• Net Income (a.k.a. Net Profit). This is what remains after necessary expenses are deducted. Novak points out that expenses that are “necessary” vary from business to business—engage with your finance people to see what is necessary to your company vs. what is discretionary.
• Assets. Assets are the “stuff” businesses own that are worth something. Assets can take many forms and can be both tangible and intangible, says Novak. Some assets might include cash in the bank, property, copyright, patents, brands, customer service models, and even good will/reputation.

The ‘Minus’ Side

Every company has expenses and liabilities—they are simply the cost of doing business. Organizations can have many categories of expenses, says Novak, including (but not limited to):

• Cost of Goods Sold (COGS);
• Wages, benefits, and incentives;
• Capital Expenditure (CAPEX), which is an amount set aside for one year to build something tangible or renovate a tangible asset (e.g., a new software system or property);
• Research and Development (R&D) expenses are any expenses incurred in the process of finding or creating new products and services. Like CAPEX, these expenses vary greatly by industry;
• Depreciation and amortization;
• Telephony (i.e., communications), insurance, and rent; and
• Product or service components.

Try BLR’s all-in-one compensation website, Compensation.BLR.com®, and get a complimentary special report, Top 100 FLSA Overtime Q&As, no matter what you decide.   Find out more.

The Balance Sheet

All of this money coming and going can be tracked through a budget. Simply put, a budget is a planning tool that brings all the financial aspects together into a coherent, logical whole, says Novak. Budgets are in place to help companies meet financial goals, and many smaller budgets fit into the budget of the company as a whole. Some common types of budgets include:

• Operational budgets. These are generally 1-year budgets, based on the fiscal year for the particular organization. The numbers here must be based in the real world in order for the budget to be a realistic planning tool. They can be built from the top down, bottom up, or collaboratively—Novak urges HR pros to understand that the operations world is VERY budget-oriented, and they should empathize with this constraint on managers and employees.
• Capital budgets. These are generally “use it or lose it,” says Novak, and for a certain predetermined amount—the CAPEX. The amount of capital available at any given time for new projects is limited, and departments are literally competing for these funds, says Novak. So, if you’re looking for that brand new HRIS system, understand it’s competing for scarce dollars—you need to build a strategic financial case.

A common report to be familiar with is a balance sheet, which is a statement of the company’s financial position on a particular date—all assets compared to all liabilities. It is a snapshot, a historic document of what exists at that point, says Novak, and, naturally, it should balance. Your total assets must equal your total liabilities—any difference is made up by owner or shareholder equity (but when we get into these minutiae, we’re venturing into CFO territory!).

In tomorrow’s Advisor, we will present how HR fits into this financial picture, plus we introduce the all-things-compensation-in-one-place website, Compensation.BLR.com®.