How Important is it for HR to Understand Finance?

  • Updated on: 10 Apr 2023
  • Published on: 22 Jun 2021
How Important is it for HR to Understand Finance?

HR’s passion for employee welfare and finance’s love for financial metrics in an organisation aren’t two distinct functions operating in different universes. The two departments co-exist and function together along with sales, production, marketing and other departments. While HR is tasked with hiring and training the production force, it requires digesting quite a lot of financial information to yield efficiency in its day-to-day operations. An increasing number of organisations are realising the importance of HR and Finance working together. According to an EY Global Survey:

  • 80% of Chief Finance Officers (CFOs) and HR leaders hold that working together leads to better performance.
  • Companies that are high-performing spend 50% more time to better integrate HR and Finance. 

Another study revealed some compelling stats about where the wind is blowing in the corporate sector with respect to the C-level, IT, Finance and HR. Of the total number of respondents:

  • 35% of the participants were planning to introduce a shared HR and Finance function within a year.
  • 46% of the participants from HR and Finance found their collaboration improving significantly.
  • While 42% of the participants saw a considerable increase in productivity and performance.   

The Interdependence: Marriment of Finance and HR

HR and Finance, in an organisation, don’t operate in watertight silos where one is disallowed to invade the operations of the other. The majority of the roles are either overlapping or interdependent when it comes to HR and finance, besides their conventional well-designated functions. For instance, recruiting and hiring involves a considerable number of procedures that add to direct and indirect costs whereas payroll management requires the combined focus of both of them. The data collected by Finance becomes the input for HR to make sound decisions for employee satisfaction and profit maximisation which in turn impacts financial statements. 

The primary task of any HR department is to deliver results for the maximisation of the efficiency of the personnel. This is possible only when HR is fully integrated into the business process and is involved in the financial aspects of the business. 

Why the Metrics Matter for HR? 

John Love, Executive Vice President at TML Group posited a great insight on the HR-Finance marriage: 

“If HR professionals want to move up into senior management roles and make a difference as a partner in the business, an understanding of finance and accounting is essential.”

HR professionals seeking to understand the language of business, i.e. finance also learn what revenues drive their company and what costs tether it. HR people need to be a business person before they become an HR leader. A report released by the Human Resources Professionals Association(HRPA) and Knightsbridge Human Capital stated the viewpoints of top CEOs. As per them, even though senior HR executives stand on equal footing by contributing valuably and acting as trusted advisors to the firm, they often fall short of understanding the actual business challenges. Left on their own, HR is incapable of understanding the cost implications of a program while Finance may grow inconspicuous of its impact on workplace demographics. 

Jerry Curtin, Director of human resources for Standard Process Inc. remarks, “When HR can validate benefits investments with real metrics, finance is beyond happy.” 

Sharing of Data: Shared Goals

HR and Finance both need to have control over the employee data to understand key factors impacting their capabilities, such as:

  • Employee absenteeism
  • Employee turnover
  • Payroll
  • Common business-wide system engagements

Having different sets of data sources can prove fatal to their missing opportunities leading to a lack of efficiency. Once available, real-time financial analytics can help HR to be able to offer competitive salaries and benefits. Experts cite a collaborative approach to data sharing as a powerful tool to encourage integration. HR expert Cristine Sauter confirms the same, “HR and finance can create incentives that reward exemplary work while increasing morale, production and customer satisfaction… all of which have a huge effect on the bottom line and profit.”   

Tackling  High Employee Turnover

Employee retention is a common ground for both HR and finance to save on indirect costs of recruiting again and again. And high employee turnover is a big issue bothering businesses today.  Organisations can suffer losses between 30% to 200% of an employee’s salary each time they replace an employee. Recent findings have shown that 80% of the employee turnover is due to bad hiring decisions which are a direct result of mismatched communication between the two departments.

Optimising Costs

In cases where the largest spend is on human capital, it becomes pertinent for HR and Finance to balance cost management along with attractive programming. Working together, they can control the indirect costs involved in recruiting, hiring and training new employees. Moreover, they can bring in incentives to reward exemplary performance to boost the morale of employees, thus increasing productivity and ultimately customer satisfaction. Obviously, customer satisfaction affects sales and profit. Profit is what drives the business operations and is the common goal of all the departments.  

Planning Strategies

To quote statistically, 84% of the value that a business holds is contained in its intangible assets – the people and their ideas. While HR is well-positioned to manage those assets from the people’s perspective, understanding financial metrics can facilitate their progress better.  Working on shared goals helps avoid duplication of work and conflict among the departments leading to poor productivity and low engagement. When collaborative planning sets in, open communication pervades leading to better coordination of operations. An organisation fluid in its operations is better positioned to tackle competition. 

Management is an all-pervasive activity. The good news is that HR and Finance are working towards finding a common functionality to support each other and in turn, add to the organisational goals. To close the case, Effective use of capital, greater revenue and cutting on costs should be the main aim of HR and Finance. As of now, HR just needs to talk and understand numbers to woo Finance into working together. 

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