Practical finance applications for HR Eng - TMS Consulting

Practical finance applications Practical finance applications for HRfor HR- and why it is business - and why it is business criticalcritical

PPhilip Chow hilip Chow 周子诺 周子诺 tms.philip.chow@gmail.comtms.philip.chow@gmail.comhttp://t.qq.com/tmsphilipchowhttp://t.qq.com/tmsphilipchowtmsphilipchow.blogspot.hktmsphilipchow.blogspot.hk

“The Strategic Talent Management Model”

Corporate Branding-Best practices- public recognitions - local /overseas awards - publicity in medias - Icons

Succession Planning-Hi performers-Career choices-Development programs - Sr mgt mentorship - BSC w/ KPIs - Assessment panel - mentee > mentor -

Strategic Partner-BD involvement-L&D / Performance review provision- Service, OD models-BSC, KPIs- strategic workshop - strategy /culture map-Staff survey

Training & Development- technical & mgt competence analysis- training curriculum- project mentoring- mgt process models-- certification & awards

Com and Ben-Market intelligence-Reward for the best-Educate and outplace worst- continuous reward the best- retention

Performance Review -BSC and competence base - career planning - rating/feedback t standardization - hi/lo performers - continuous monitoring

Recruitment-Job description- structured interview- interview template- assessment centers and tool-S r. mgt buy-in- performance follow up

Competence

Compensation, performance review – HR meets Finance

Some basic definitionsSome basic definitions

Sales Expenses Profits- =

SalariesPeople cost

Non-people cost

Traditionally HR’s key concern…

Figures in HK$ millions

TV Station and Furniture TV Station and Furniture MakerMaker

Salaries 1,533 687

Total expenses 3,261 3,177

Salaries as % ofexpenses

47.0% 21.6%

TV Station Furniture Maker

Q: Assuming a 5% increase in salaries, which company will suffer a steeper decline in profits?

+5% salaries -77 -34

New profit 2,110 65

Fall in profit -3.5% -34.7%

Sales 5,448 3,276

TV Station Furniture Maker

Salaries 1,533 687

Total expenses 3,261 3,177

Salaries as % ofexpenses

47.0% 21.6%

TV Station and Furniture TV Station and Furniture MakerMaker

Profit 2,187 99

Profit margin 40.1% 3.0%

Same answer?

+5% salaries -77 -34

New profit 2,110 65

Fall in profit -3.5% -34.7%

Sales 5,448 3,276

TV Station Furniture Maker

Salaries 1,533 687

Total expenses 3,261 3,177

Salaries as % ofexpenses

47.0% 21.6%

TV Station and Furniture TV Station and Furniture MakerMaker

Profit 2,187 99

Profit margin 40.1% 3.0%

Operating leverage

How salary rise affects profit depends on◦Salaries as % of total expenses◦Operating leverage/company profit margin

A life-and-death gatekeeping A life-and-death gatekeeping rolerole

Port terminal 34.8% 15.3%

Margin %Salaries as %of expenses

TV station 40.1% 47.0%

Restaurant 8.8% 29.4%

Property agency 11.3% 61.6%

Export factory

Fall in profitsif salaries +5%

3.0% 21.6%

-1.4%

-3.5%

-15.3%

-24.2%

-34.7%

“The Strategic Talent Management Model”

Corporate Branding-Best practices- public recognitions - local /overseas awards - publicity in medias - Icons

Succession Planning-Hi performers-Career choices-Development programs - Sr mgt mentorship - BSC w/ KPIs - Assessment panel - mentee > mentor -

Strategic Partner-BD involvement-L&D / Performance review provision- Service, OD models-BSC, KPIs- strategic workshop - strategy /culture map-Staff survey

Training & Development- technical & mgt competence analysis- training curriculum- project mentoring- mgt process models-- certification & awards

Com and Ben-Market intelligence-Reward for the best-Educate and outplace worst- continuous reward the best- retention

Performance Review -BSC and competence base - career planning - rating/feedback t standardization - hi/lo performers - continuous monitoring

Recruitment-Job description- structured interview- interview template- assessment centers and tool-S r. mgt buy-in- performance follow up

Competence

Sales as a KPI –how to Sales as a KPI –how to cheat…cheat…

Sales 2,704 2,076 +30.3%

2010 2009 Change %

Profit 272 226 +20.2%

Profit Margin 10.06% 10.91% -0.84%

Net assets 2,303 1,518 +51.8%Good year for company M. Sales +30%CEO asks Chairman for performance bonus

Should he get it?

Sales as a KPI –how to Sales as a KPI –how to cheat…cheat…

Sales 2,704 2,076 +30.3%

2010 2009 Change %

Profit 272 226 +20.2%

Profit Margin 10.06% 10.91% -0.84%

Net assets 2,303 1,518 +51.8%

Profit increase less than sales increase“Cheating” with expenses

Sales as a KPI –how to Sales as a KPI –how to cheat…cheat…

Sales 2,704 2,076 +30.3%

2010 2009 Change %

Profit 272 226 +20.2%

Profit Margin 10.06% 10.91% -0.84%

Net assets 2,303 1,518 +51.8%

Performance measurementshould also refer to profit margin

Sales as a KPI –how to Sales as a KPI –how to cheat…cheat…

Sales 2,704 2,076 +30.3%

2010 2009 Change %

Profit 272 226 +20.2%

Profit Margin 10.06% 10.91% -0.84%

Net assets 2,303 1,518 +51.8%

Assets +50% - e.g. 50% bigger factory;+50% uncollected cash from customers

What is wrong with more assets?

Collecting CNY5,950mil meansInterest income of 200mil per year from

bank depositsInterest expense savings of 400mil per

year – if used to repay debtsUse cash for business development –

returns = ????Opportunity costs! All things equal

companies should strive to be asset light…

A A ccertain PRC company’s accounts ertain PRC company’s accounts receivables – ie. Uncollected cashreceivables – ie. Uncollected cash

22,720m CNY 16,770mil +5,950mil

2012 2011 Change

Sales as a KPI – how to Sales as a KPI – how to cheat…cheat…

Sales 2,704 2,076 +30.3%

2010 2009 Change %

Profit 272 226 +20.2%

Profit Margin 10.06% 10.91% -0.84%

Net assets 2,303 1,518 +51.8%

Return onnet assets

11.82% 14.92% -3.10%

Performance measurement shouldrefer to return on net assets too

Assets +50% - grew faster than sales and profitShould be penalized

Sales as a KPI – how to Sales as a KPI – how to cheat…cheat…

Sales 2,704 2,076 +30.3%

2010 2009 Change %

Profit 272 226 +20.2%

Profit Margin 10.06% 10.91% -0.84%

Net assets 2,303 1,518 +51.8%

Return onnet assets

11.82% 14.92% -3.10%

Performance measurement shouldrefer to return on net assets too

Some basic definitionsSome basic definitions

Profit

Net assets

Return onnet assets

____________ =

AP Moeller Maersk – World’s #1 shipping company

Returns as a KPI – widely Returns as a KPI – widely employed by MNCsemployed by MNCs

ConclusionConclusionOperating leverage – A small

increase in salaries can completely wipe out profits

Setting KPIs – Sales growth is easy to cheat! Refer to expenses and assets also

Where do I find all these?

Sales

Profits

A variety of expenses, some other items too

Where do I find all these?

Usually “hard”labour – e.g. factory

Head office costs,salespersons, etc

More details in the footnotes

Directors’ rewards as well…

Assets/Liabilities on the balance sheet

Assets Liabilities Net assets- =

Other topics I talk about…Other topics I talk about…Capital raising – China and overseasBest investor relations practicesCyclical industry analysis