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I wasnt sure the CFO and HR Director are best friends in the first place. But lately they probably dont have much of a choice. Sky rocketing wages in China (and in many parts of Asia) means that what were two "seperate silo"s just have to work much more closely together. So they became close tennis buddies...but figured they dont even speak the same language. Attached the latest HKIHRM seminar on corp fin conducted for HR professionals. Also reran in Chinese for Shanghai University MBA Students. This is released as part of a series hosted by my partner Steve Chow
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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 [email protected]@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
