Business Acumen for Compensation Professionals (CCP)

Income Statement

"PNL Statement" Covers a period of time, shows revenues earned, expenses incurred. Shows profitability. For public companies = dividends or $ goes to retained earnings to grow company.

Balance Sheet

"Snap Shot" Statement of financial position as specific date, list whats owned (assets), what's owed (liabilities), equity of entity (shareholder equity/ownership position). Shows book value of company and represents financial health.

Data Analysis

*Identify gaps...* data that might be missing and plans on how to to address gaps, recognize *when not using data effectively.* Also, *identifies trends...* the *"full picture" and key messages* emerging overtime.

Marginal Cost

*If revenue accelerates faster than costs* then cost per unit sold and/or you have high fixed costs, *then costs per unit sold will decrease as you produce and sell more.*

Contributions to Organizational Success

*Thinking strategically* leads to understanding financials. Overtime, you will *learn how to discuss influences on your organization bottom line* including ROI.

Types of Working Capital

1. Accounts receivable turnover/days receivable (how often company gets paid, net 30/60/90) 2. Inventory turnover/days inventory (Inventory has a cost. If in inventory, not selling) 3. Payable turnover/days outstanding (how quickly company pays their bills. this can be the first sign the company is having troubles)

Primary Types of Financial Reports

1. Annual Report 2. Quarterly report

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.

Types of Financial Statements

1. Balance Sheet 2. Income Statement 3. Cash-flow Statement *All three provide a comprehensive view of the company's financial situation. Need all 3 to determine health of organization.

Reasons Organizations Use Financial Reports

1. Standardize data across companies and industries. 2. Promote consistency of financial communication. 3. Provide information to key constituent (i.e. leaders, managers, shareholders, lenders, govt).

Stages of Business Life-cycle

1. Start-up 2. Growth 3. Mature 4. Decline

Questions to Ask when Forecasting

1. What will our workforce needs be? 2. How will pension liability change? 3. How fast will markets grow or shrink? 4. Can we gain market share? 5. Can we increase pricing? 6. How much money do we need? 7. Are prices stable?

Investment Forecasting Questions

1. Where do we have to invest to generate profit? 2. What is our maintenance capital expenditure? 3. What is our investment capital expenditure?

Forecasting

A "best guess" of what the future holds based on internal factors (historical data, sales data) and external factors (market conditions, economic indicators).

Value of Money in Time

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.

Profit (source of capital)

Money that comes from sales.

Equity (source of capital)

Money that investors pay to own a share of business.

Debt (source of capital)

Money that is borrowed usually in loans or notes.

Accrual Accounting

Most common accounting practice of companies, revenues and expenses are recorded when they occur regardless of cash flow. Separation of cash is the essence.

Return on Capital/Invested Capital

Net Operating Profit after Taxes (NOPAT)/Invested Capital

EPS (profit measure)

Net income/common shares outstanding

Start-up (life-cycle)

New, little to no policies, focus on obtaining capital, marketing products, initial sales, cash conservation.

Financial Management Competencies

1. Broad understanding of financials & ensure funding 2. Understanding ROI 3. budget for programs 4. cost benefit thinking 5. expenditures 6. Cost effective approaches 7. Manages procurement & contracting 8. Assess performance plans

Key Performance Indicators

1. Cost Analysis 2. Cost Leverage 3. Operating Profit 4. Marginal Cost

Characteristics of a Compensation Professional with Business Acumen

1. Demonstrate influencing and negotiation skills in order to navigate the approval process. 2. Be an expert with data because compensation & rewards can be emotional. Relate compensation to business results/bottom line. 3. Navigate regulatory challenges. It's your fiduciary responsibility.

Resource Management Competencies

1. Determine sources and collect data to facilitate fact-based decisions. 2. Partner with internal staff and external consult/vendors. 3. Use efficient and cost effective approaches to integrate technology.

Growth Forecasting Questions

1. How fast are we growing by measuring revenue, fixed and variable cost, profits, division or product line?

Profit Forecasting Questions

1. How much profit are we earning for each dollar of revenue? 2. How much profit are we earning compared to peers?

Elements of the Compensation Plan that Influence Organization Business Strategy

1. Investment in resources 2. fixed and variable compensation 3. market competitive posture *Business Strategy --> HR Strategy --> Reward Strategy --> Compensation Strategy

Business Acumen Skills and Behaviors

1. Mission, vision, values. 2. Business strategy. 3. Organizational culture. 4. HR strategy. *All 4 of these tie into the Reward Strategy.

Types of Competitive Strategy

1. Operational Excellence 2. Product/service Leadership 3. Customer Intimacy

Strategy (specific definition)

The *broad framework* of principles and approaches that *guide the day-to-day decisions* affecting the business, including *how a company positions itself in the market*.

What sets top performers apart?

The ability to tie the key competencies together and distill key messages to impact 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. Why are we in business?

Fixed and Variable Compensation

The mix may be impacted by bottom line. If an employee has a significant impact on the bottom line, an organization would be more likely to motivate those employees with variable pay when goals achieved push overall profit.

Organizational Culture

Understanding the culture and subcultures of the organization.

Mission, Vision, & Value

Understanding the purpose of your organization, how it creates value, how it makes money.

Business Strategy

Understandings your customers, competition, and competitive advantage. (the three c's)

Question Mark

high growth, low market share use cash to sustain growth, ability to generate profit is unknown

Star

high market share, high growth potential use cash to sustained growth which can lead to high profits

Cash Cow

low growth, high market share cash used to develop businesses and other segments, such as question mark's

EBITDA (profit measure)

| EBIT + Depreciation + Amortization | Same as EBIT but adds annual charge from previous capital investments, often largest non-cash expense, indicative of real cash generated by business.

Net Income (profit measure)

| EBIT - Interest - Taxes | Earnings available to equity owners after paying debt and taxes.

EBIT (profit measure)

| Gross Profit - Expenses | Earnings before interest and taxes, also called "operating profit", how much the organization earns before financing the business. *Internal measure that can be controlled by executive team.

Gross Margin (profit measure)

| Gross Profit/Gross Revenue | Looks at how efficiently the organization is operating.

Return on Equity

| Net Earnings/Shareholder Equity | "Ownership Position" Profit position relative to the money held by shareholders.

Return on Assets

| Net Earnings/Total Assets | For every $1 what is the asset earning.

Values

Guiding principles and or beliefs shared by stakeholders. How we work and who we are. What kind of organization do we want to create in pursuit of our vision?

Working Capital Efficiency

How quickly the organization converts short-term capital into cash.

Cost Leverage

If an organization grows *revenue faster than costs,* profit growth will accelerate. If the *cost of producing that revenue decreases with volume*, the profit growth will accelerate even more. Find a *balance* in order to *maximize profit.*

Product/service Leadership

Innovation based strategy, product development, market exploitation, best products, better ideas, commercialize faster than competition.

Amortization

Intangible Assets

HR Strategy

Ability to speak about your area of expertise and collaborate with others from other business units.

Investment in Resources

Bottom line directly related to investing in HR resources including comp resources. Bottom line increases = more opportunity to invest in comp and HR resources. Willing to invest more If high return predicted

Self-improvement and Career Development

Better at *connecting your activities and the success of the wider organization's* which leads to opportunities for cooperative value creation, *understanding business disciplines and what is critical to their success,* and displaying confidence and decisiveness, be a better leader, and *inspire and excite others.*

Compensation as a Percentage of Overall Operating Cost

Compensation is often large percentage of overall operating cost. Must understand total reward cost as a % of total operating costs. If high %, consider the design of the reward program.

Cash Flow Statement

Explains change during period in cash and cash equivalents and comprehensive view of the company's financial situation.

Importance of Business Acumen

Contribution to organization's success, engaging with executive leadership, self-improvement and career development.

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.

Return on Capital

Describes how effectively the organization is investing capital. High rates of return creates more value.

Strategic Analysis

Evaluating the *industry and market economics*, understanding business and *competitive strength and weaknesses,* determining *possible future changes.*

Key Competencies for Compensation Professionals

Financial Management, HR Management, & Resource Management

Cost Analysis

Fixed cost do not vary for each dollar of revenue (i.e staff, audit fees, maintenance, rent) Variable costs vary for each dollar of revenue. If sales are low, VC costs are low. If sales increase, production cost increase (i.e. 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 (life-cycle)

Focus on maintaining/increasing market share, improving productivity, reduce costs, improvements to products are evolutionary (not revolutionary), greater amounts of cash on hand when compared to other stages in the life-cycle.

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.

Depreciation

Loss in value of hard assets.

Dog

Low market share, low market growth uses cash from other segments

Customers (balance scorecard)

Market share, customer satisfaction and loyalty. poor performance can equal decline even if financial state is strong.

Market Metrics

Measures potential gap between shareholder and management expectations for the future, include market ratios and multiples that indicate the premium investors place on the company's earning of capital. Combined perspective of future growth potential and perceived risk.

TSR (total shareholder return)

Measures the total return shareholders have earned on their investment.

Accrued Expenses

Payday Jan 8 is for prior two weeks, accrued cost for two weeks are recorded in prior year's income statement including base salary and related benefits.

Profit Model

Plan for how organization generates revenue/makes money. why customers are willing to pay for our goods and services.

Time Value of Money

Present value (PV) will increase to a future value (FV) with the inclusion of time (N) and interest rate (%i).

Operational Excellence

Price/cost-based strategy, combo of price, quality, dependability, ease of purchase, minimizing waste, rewarding efficiency. Usually operates on a thin profit market and obsessively watching costs (i.e. Walmart).

Sources of Capital

Profit, Equity, & Debt.

Operating Profit

Profits accelerate as a company sells more for same fixed cost, even better when variable costs do not increase at the same rate as sales.

Business Analytics

Refers to *skills, technologies, applications, practices* of exploration and investigation of business performance to *gain insight and drive planning.*

Engaging with Executive Leadership

Represent compensation in business outcomes and facilitating with and thinking like business leaders helps *align your department's decisions with the company's mission and financial priorities.*

Annual Report

Results for a 12-month fiscal year (does not have to be calendar year).

Profit Measures

Revenue, gross profit, EBIT, EBITDA, net income, EPS, growth and (gross) margin.

Decline (life-cycle)

Revenues are declining, decide to reinvest, create new, or maximize profits with current products.

Financial (balance scorecard)

Revenues, earnings, return on capital, cash-flow. Needed to measure financial success, too much focus can overshadow other critical factors.

Balanced Scorecard

Seeks to use multiple metrics (quantitative & qualitative) to capture trade-offs in decision-making & investments.

Quarterly Report

Shows basic financial results for each 3-months period. Compares to previous year same quarter and cumulative comparables, not as detailed as the annual report. *4th Quarter data won't necessarily be a perfect match to annual but should be close.

Growth (profit measure)

Shows how fast an organization is growing.

Margin (profit measure)

Shows how much organization earns per dollar of revenue, how efficiently the organization is operating, and what operating leverage is for the organization in percentage.

Customer Intimacy

Solution-based strategy, creating results for customers by building bonds to build loyalty.

Market-to-Book (market metric)

Stock Price/Book Value per Share

Price to EBIT/EBITDA Ratio (market metric)

Stock Price/EBIT or EBITDA per share

Price to Earnings Ratio (market metric)

Stock Price/Net Earnings per Share

Price to Revenue Ratio (market metric)

Stock Price/Net Sales per Share

Vision

What organization wants for the future. Who we are and where we are heading?

Accrued Revenue

When company ships an order it is recorded as a sale even though payment is not received until sometime in the future.

EVP (Economic Value Added) *Calculation is on the Test!!

| Net Operating Profit after Taxes (NOPAT) - (Capital x Cost of Capital) | Determines if you should borrow to grow. For example, If you want to build a new building in Chicago, where the NOPAT = 10,500,000. Take a loan for 10 million at 8%. 10,500,000 - (10,000,000 x .08) = 9,700,000. Next step, test value. Take EVP - borrowed amount. If negative, not good to borrow. Go back to the bank to get a better percentage rate.

Gross Profit (profit measure)

| Revenue - COGS | How much the organization earns from each unit.

Revenue (profit measure)

| Volume x Price | The top line on the income statement or starting point of an organization' income.