Business Acumen
HR Management Competencies
1. Assess current and future staffing needs based on goals and budget. 2. Ensure staff are selected, developed, appraised and rewarded 3. Take corrective action 4. Understand basic org design principles
Financial Management Competencies
1. funding 2. ROI of programs 3. budget for programs 4. cost benefit thinking 5. expendetures 6. Cost effective approaches 7. procurement & contracting 8. performance plans
Elements of comp plan directly influenced by org bsns strategy
Investment in resources, fixed and variable comp, market competitive posture
Accrual accounting
Most common accounting practice of companies, revenues and expenses are recorded when they occur regardless of cash flow
Operating departments
Narrow view of comp. Want to spend to attract, retain and motivate. May think comp is the problem or change to comp plan is solution
Special consideration to partnerships with finance
Need data from finance to support numbers. Collaboration should be continuous channel for cultivating data sources
EPS
Net income/common shares outstanding, earnings per-share
Start up lifecycle
New, little to no policies, focus on obtaining capital, marketing products, initial sales, cash conservation
Resource Management Competencies
1. Determine sources and collect data to facilitate decisions 2. Partner with internal staff and external consult/vendors 3. Use efficient and cost effective approaches to integrate technology
Business acumen skills and behaviors
1. Mission, vision, values. Understanding the purpose of your organization, how it creates value, how it makes money 2. Business strategy. Understandings your customers competition and competitive advantage 3. Organizational culture. Understanding the culture and subcultures of the organization 4. HR strategy. Ability to speak about your area of expertise and collaborate with others
Why organizations are in business
Purpose is reflected in mission, vision, values, strategy, profit model
What sets apart top performers
The ability to tie the key competencies together, distill key messages and make impactful decisions
Market competitive posture
The bottom line determines position in the market. Market median or market upper quartile, lead, lag, lead lag
Mission
The intention or purpose of the business, answers why are we in business?
Fixed and variable comp
The mix may be impacted by bottom line
Quantitative data
The numbers
Qualitative data
The people, talk to key stakeholders and employees to get concerns of workforce
Employee connections
Understand needs of emplotees in diff units and ar diff levels, know who you can turn to for help
Contributions to organizational success
Understand the financial and strategic context of your organization, influence the organizations bottom line and financial results
Multiple perspectives
Understanding of other functional areas, looking at business problems. Healthy tension creating a check and balance feel identify areas of conflict, leverage ability to communicate
Investment forecasting questions
Where do we have to invest to generate profit, what is our maintenance capital expenditure, what is our investment capital expenditure.
Identify key influencers and decision-makers
Where does the power lie, who do employees listen to, who will be the opponents, how do you address concerns
EBIT
Gross profit minus expenses, earnings before interest and taxes, also called operating profit, how much the Org earns before financing the business
Growth and margin
Growth rates look at how fast org is growing. Margins at how much organization earns per dollar of revenue, how efficiently operating leverage is.
Values
Guiding principles and or beliefs, how we work and who we are. What kind of organization we want to create in pursuit of our vision
Return on capital
How effectively org is investing capital. Return on equity = net earnings/shareholder equity, return on assets = net earnings/total assets, return on capital/invested capital = net operating profit after taxes/invested capital, economic value added = net operating profit after taxes minus (capital times cost of capital)
Growth forecasting questions
How fast are we growing by measuring revenue, fixed and variable cost, profits, division or productline.
Determining possible future changes
How is industry expected to change, what are we doing to improve our competitive position
Forecasting profit questions
How much profit are we earning for each dollar of revenue, how much profit are we earning compared to peers
Working capital efficiency
How quickly org converts short-term capital to cash Accounts receivable turnover/days receivable, inventory turnover/days inventory, payable turnover/days outstanding
Data analysis gaps
Identify missing data plan to address gaps, recognize when not using data effectively
Data analysis trends
Identify trends and key messages emerging overtime, review budget requests over 2 to 3 years, key issues and messages
Cost leverage
If org grows revenue faster than costs profit growth will accelerate. Find a balance in order to maximize profit
Marginal cost
If revenue accelerate faster than costs then cost per unit sold will decrease as you produce and sell more
Product/service leadership
Innovation based strategy, product development, market exploitation, best products, better ideas, commercialize faster
Types of financial reports
Annual report - shows 12 mos result, called the school year, sometimes matches calendar year sometimes not. Quarterly report - shows basic financial results for three months. Compares to previous year same quarter and cumulative comparables, not as detailed
HR
All business problems are ultimately HR problems. Need to spend a certain amount to attract retain and motivate, need comp programs to complement strategies
Budgeting
Amount of revenue to be generated, cost to generate, other expenses including debt
Investment in resources
Bottom line directly related to investing in HR resources including comp resources. Bottom line increases = more comp and HR resources. Willing to invest more If high return predicted
Competitive strategy
Broad framework of principles that guide day to day decisions affecting business.
How to help achieve objectives of decision-makers
Build alliances
Types of financial statements
Balance sheet, income statement, cash flow statement
Self-improvement and career development
Better understand connections between you and wider org opportunities for cooperative value creation, understand business disciplines and what is critical to their success, Display confidence and decisiveness, be a better leader, inspire and excite others
Effective communication
Comp uses many technical terms. Understand your audience. Prepare to Taylor communication
Evaluating the organizations financial state
Businesses evaluate to make decisions on expected return, occurs in annual budgeting and long-range planning
Collaborate
Contribute to Org goals, identify key influencers, decision-makers; consider how to help them achieve objectives, give consideration to partnerships with finance
The importance of business acumen
Contributions to organizational success, engaging with executive leadership, self improvement and career development
Key performance indicators
Cost analysis, cost leverage, operating profit, marginal cost
Income statement
Covers a period of time, shows revenues earned, expenses incurred. Shows profitability
Cash flow statement
Explains change during period in cash and cash equivalents, comprehensive view of the company's financial situation
Strategy
Goals directions to achieve goals and policies to support. How we are going to compete and achieve our mission and what makes us different
Business acumen for the comp professional
Demonstrate influencing and negotiation skills, be an expert with data, navigate regulatory challenges
Forecasting
Determining what the future holds based on historical data and External factors
Legal
Direct tie to comp. Follow local regional and national laws and regulations
EBITDA
EBIT+depreciation+amortization, same as EBIT but adds annual charge from previous captl investments, often largest non-cash expense, indicative of real cash generated by business
Net income
EBIT-interest-taxes, Earnings available to equity owners after paying debt and taxes
Contribute to organizational goals
Easy to get caught in comp silo, business acumen helps with big picture and how comp should contribute to larger goals
Strategic analysis
Evaluating the industry and market economics, understanding business and competitive strength and weaknesses, determining possible future changes
Key Competencies for Comp Professionals
Financial Management, HR Management, Resource Management
Other performance metrics
Financials - revenues, earnings. Needed to measure financial success, too much focus can overshadow other critical factors. Customers - includes market share, customer satisfaction and loyalty poor performance can equal decline even if financial state strong Internal processes - productivity, quality, deadlines. Tell how business is running a line process, reduce duplication, improve productivity Innovation and learning - employee satisfaction/engagement, turnover, employee value proposition. Employee training and development industries where employees are primary resource
Cost analysis
Fixed cost - do not vary; staff, audit fees, maintenance, rent Variable costs - vary for each dollar of revenue, sales low equals costs low, sales high equals production cost high, wages of production staff, sales comp, Raw materials, shipping
Growth life cycle
Focus on growing sales, increasing the distribution and Efficiently produce products to meet demand, begin standardizing procedures policies
Mature business lifecycles
Focus on maintaining marketshare, improving productivity, reduce costs, improvements to products are evolutionary, greater amounts of cash on hand
Connecting with other business units
Keep up to date on org challenges, work on key initiatives, discover challenges of line managers, identify and develop proactive measures
Future value
Looks at current holdings and determines how much investment will grow overtime
Present value
Looks at desired value in future and determines how much needs to be invested today to realize that amount
Market metrics
Measure potential gap between shareholder and management expectations for feature, include market ratios and multiples
TSR(total shareholder return)
Measures the total return shareholders have earned on their investment
Money in the past/money today/money in the future
Money in hand today is worth more than money promised at sometime in the future because it can be invested with interest and grow overtime
Primary focus of competitive strategy
Operational excellence, product/service leadership, customer intimacy
Accrued expenses
Payday Jan 8 is for prior two weeks, accrued cost for two weeks are recorded in prior years income statement including base salary and related benefits
Profit model
Plan for how organization generates revenue, why customers are willing to pay
Time value of money
Present value will increase to a future value with the inclusion of time and interest rate
Operational excellence
Price/cost-based strategy, combo of price, quality, dependability, ease of purchase, minimizing Waze, rewarding efficiency
Sources of capital
Profit - money that comes from sales. Equity - money that investors pay to own a share of business. Debt - money that is borrowed usually in loans or notes
Operating profit
Profits accelerate as sell more for same fixed cost, better when costs do not increase at the same rate as sales
Business analytics
Refers to skills, technologies, applications, practices of exploration an investigation of business performance to drive planning
Engaging with executive leadership
Represent the perspective of your area of expertise and articulate its role in business outcomes, align with the company's mission and financial priorities
Profit measures
Revenue, gross profit, EBIT, EBITDA, net income, EPS, growth and margin
Gross profit
Revenue-cost of goods sold, how much the Org earns from each unit
Decline business lifecycle
Revenues are declining, decide to reinvest, create new, or maximize profits with current products
Linking business strategy and comp strategy
Should be aligned with rewards strategy, HR strategy business strategy and comp strategy, comp is often large percentage of operating cost
Customer intimacy
Solution-based strategy, creating results for customers by building bonds to build loyalty
Why do orgs use financial reports
Standardize data across companies and industries, promote consistency of financial communication, provide information to Key constituents(leaders, managers, shareholders, lenders, govt)
Market position
Star: high market share high growth potential, use cash, sustained growth, high profit Question mark: low market share hi market growth, use cash ability to generate profit is unknown because low market share Dog: Low market share low market growth, uses cash from other segments Cash cow: hi market share low market growth, cash used to develop businesses and other segments, such as question mark's
Business life cycle
Start up, growth, mature, decline
Balance sheet
Statement of financial position as specific date, list whats owned, what's owed, equity of entity. Shows book value of company, represents financial health
Price to EBIT/EBITDA Ratio
Stock price/EBIT or EBITDA per share
Market to book
Stock price/book value per share
Price to earnings ratio
Stock price/net earnings per-share
Price to revenue ratio
Stock price/net sales per share
Revenue
Volume x price, The top line on a starting point of an orgs income
Investor
Wants to see long-term success and viability and growth. Want to see money spent wisely
Finance
Wants to see spending allocated wisely to increase margins and Max probability with focus on variable costs over fixed costs
Understanding business and it's competitive strengths and weaknesses
What is competitive position relative to other industry participants, what are your competitive advantages, disadvantages
Evaluating the industry and market economics
What is state of industry now, is it expected to change
Vision
What organization wants for the future, who we are and where we are heading
Questions to ask when making forecast
What will our workforce needs be, how will pension liability change, how fast will markets grow or shrink, can we gain market share, can we increase pricing, how much money do we need, are prices stable
Accrued revenue
When company ships order it is recorded as sale even though payment is not received until future
Uses of financial data and metrics
Working capital efficiency, return on capital.