Why do I need to know about it?
There is increasing attention on how much the HR function is spending, and the ROI of this spend. Estimates and qualitative statements no longer cut the mustard. HR directors need to have at least a basic grasp of profit and loss (P&L), even if they don’t necessarily have to calculate it themselves.
This will be key to their understanding of the business they serve, points out Kathryn Austin, chief people and marketing officer at Pizza Hut Restaurants. “Your company profit and loss statement illustrates the flow of where money goes and provides vital information for making business decisions – it is a map of your business,” she says. “You may or may not be directly accountable for a part of the P&L but if you aspire to being an effective strategic business partner then the clue is in the name, and being fluent in the basic economics of your company is a given.”
Hitachi’s chief HR officer Stephen Pierce agrees: “HR is often a cost centre rather than a profit centre so HR staff don’t always need to manage their own P&L. However, an understanding of the organisation’s P&L is essential if HR is to be able to speak the language of the business.”
What do I need to know?
“HR should agree with senior management on what financial measures they will be accountable for and what the acceptable thresholds are,” advises Doug Coffey from Rutgers University’s School of Management and Labor Relations. “Some HR specialities are treated purely as cost centres, and their managers are held accountable for managing costs. But more and more HR is treated as a full profit centre where the manager is held accountable for costs, revenue, and the resulting profit and loss.
“Sometimes the revenue is in the form of chargebacks for services, such as what a recruiting department may charge a hiring area to fill an open requisition or what the learning and development department may charge to put a newly-promoted supervisor through a leadership development programme,” he continues. “The costs the HR manager incurs may be from internal chargebacks from supplier areas, such as catering or security. Whether the costs and revenue are internal or external, they still affect the HR manager’s P&L.”
Where can HR add value?
While many in HR aren’t necessarily held responsible for their own P&L, Edward Houghton, human capital and metrics adviser at the CIPD, would encourage them to challenge this and start to think in these terms.
“Building knowledge of the HR function’s ‘people P&L’ will help demonstrate the importance of the function to the rest of the organisation. Becoming acquainted with the organisation’s financial statements will help to then put the function’s own P&L in context, and enable HR teams to appreciate their role in delivering financial value to the business,” he says.
“For many businesses the salary bill represents one of the most significant portions of the company P&L. In HR we are responsible for managing this line effectively to directly (or indirectly) generate a ‘P’ and not an ‘L’,” points out Austin.
A working knowledge of P&L then also equips HR professionals to better serve the company as a whole. “In the broader sense we are strategic business partners to all the other functions in the organisation so understanding the whole P&L is also vital to provide sound judgements and advice,” Austin says.
Financial knowledge can be useful for career moves and cross-functional learning. As Rutger’s Coffey points out: “Human resource professionals who understand the wider business are equipped to apply that understanding to many facets of their work. Many take on new roles in areas outside of HR, so what better preparation than learning about the business and its finances? For those who aspire to move into director and higher roles, financial aptitude is a key part of the price of admission.”
Although it may seem daunting, there are plenty of ways to beef up your financial know-how. Pierce recommends being on the distribution list for the monthly P&L report, and asking plenty of questions. “Networking with colleagues in areas such as corporate finance, analysis and planning may help HR managers to put their business in a financial framework,” agrees Coffey.