Business: Strategic Alignment of Resources Flashcards
Budgets
- Planning and measurement tool
- Anticipates time and disbursement of funds
- Identifies type and amount of work or results to be produced
- Provides control and transparency of assets
Incremental budgeting is also known as
Line-item budgeting
Incremental budgeting
- Traditional form of budgeting.
- The prior budget is the basis for the next budget.
- Prior budget is simply increased (or decreased) by a set percentage.
- Additional funds must be requested based on need and objectives.
Incremental budgeting advantage
Less time consuming
Incremental budgeting disadvantage
Does not recognize changes in business circumstances or practices
Zero-based budgeting
- All objectives and operations are given a priority ranking.
- Each unit or goal is ranked, and then available funds are given in order.
- All expenditures must be justified for each new period, and budgets start at zero.
Zero-based budgeting disadvantage
Time-intensive at first but becomes more efficient with experience
Zero-based budgeting advantage
Reduces wasteful spending practices that go unchallenged in traditional budgets
Activity-based budgeting
- Recognizes the interrelationships among the various activities required to create value in an organization.
- Budget is not based on dividing a set amount of money but how much it costs to perform different enterprise activities.
- Funding may be allocated based on the strategic significance of the activities.
Benefits of activity-based budgeting
- Gives leaders more control on spending
- Estimates are more precise
Formula-based budgeting
The total amount of a function’s budget is apportioned to departments or activities according to defined percentages.
Capital costs
- One time investments in physical assets (ex: buildings, land, equipment)
- Budgeted separately from operating costs
HR Budget Includes
- Ongoing operational costs related to HR’s essential services
- One-time project costs planned to support HR strategy and objectives
First step of HR leaders in process of allocating resources to strategic activities
- Compare previous/current activities and budget allocations to what is needed to support proposed organizational strategy
- Several years of HR data with trends of expenses is helpful in defining new budget
Business case
- Presentation to management that establishes that a specific problem exists and argues for a proposed solution.
- Best way to solve problem: time, cost efficiency and probability of success
Forms of business cases
Written or oral
Components of business cases
- Statement of need
- Recommended solution
- Risks and opportunities
- Estimated costs
- Time frame
Business case statement of need
The condition or change impelling the function’s action
Business case recommended solution
- Objectives for an ideal solution are designed
- Proposed action is described in detail to show how to meet the objectives
- Some cases, alternative actions are described as well and why they are not recommended
Objectives of ideal solution
The desirable outcomes of an initiative
Business case risks and opportunities
- Outcomes that could decrease the project’s chance for success,
- Outcomes that could present new opportunities that would require action
- Risks of doing nothing at all.
Business case estimated costs and time frame
- The project budget should include all foreseeable elements (labor, equipment, fees, travel, and so on) plus a reserve for the unforeseeable based on the project’s risk.
- Time frame - keep the project requirements and organization needs
Tips for Creating Effective Business Cases
- Research your proposal carefully
- Align your proposal with organizational strategy.
- Get early buy-in from key decision makers and influencers.
- Put your proposal in writing
- Include specific metrics to evaluate its effectiveness.
How to research your business proposal carefully
- Gather facts.
- Investigate alternatives.
- Consider risks.
How to put business proposal in writing
- Explain the issue and needs.
- Describe the solution using facts, not emotion.
Key financial statements to evaluation organization’s financial health
- Balance sheet
- Income statement
- Cash flow statement
Understanding the financial statements help HR professionals
- Understand the perspectives of internal and external stakeholders
- Identify opportunities to improve the organization’s financial performance
- Understand factors that may affect HR strategy
Balance sheet
- Statement of an organization’s financial position at a specific point in time
- Shows assets, liabilities, and shareholder equity.
- Only transactions measurable in money are recorded.
- Transactions without a definite monetary amount are not placed on a balance sheet.
Balance in balance sheet
Every financial transaction is an exchange, and both sides of the transaction are entered on the balance sheet to reflect assets, liabilities, or equity.
Asset formula
Assets = Liabilities + Equity
Equity formula
Equity = Assets – Liabilities
Assets
- Financial, physical, and sometimes intangible properties an organization owns.
- Can also include accounts receivable
Accounts receivable
Money an organization’s customers owe the organization.
Liabilities
Organization’s debts and other financial obligations.
Accounts payable
Money an organization owes its vendors and suppliers.
Equity
Amount of owners’ or shareholders’ portion of a busines
Stockholder equity
Value of all stock held by investors
Income statement
Revenues, expenses, and profits for a specified period of time, for example, quarterly or annually.
Income statement is also known as
Profit and loss statement (P&L)
Net income formula
Net income = Revenues – Expenses
Key metrics from income statement
- Gross profit margin
- Net profit margin
Gross profit margin
Compares gross profit with sales
Gross profit margin formula
Gross profit margin = Gross profit ÷ Net sales
Net profit margin
- Net income is what a business has after paying interest and taxes
- Available for reinvestment or distribution to owners and stockholders
Net profit margin formula
Net profit margin = Net income ÷ Net sales
Some expenses are never cash outflows
Are only accounting items and some expenses may be paid in cash in this period and partly in the next period
Owner withdraws
- Not an operating expense
- Are a distribution out of net income
Cash flow statement
- Statement of an organization’s ability to meet its current and short-term obligations
- Show incoming and outgoing cash and cash reserves in operations, investments, and financing
Three areas of cash flow statment
- Operations
- Investing
- Financing
The balance, trends, and relationships in the areas of the cash flow statement
Usually interpreted by outside financial experts (banks or investors) as signs of sound or weak management
Negative cash flow in operations could indicate
Sales are too low and/or cost of production is too high for the organization to stay in business
Positive cash flow operations could indicate
The ability to repay debt and meet expenses
Negative cash flow in investing could show
Organization is not continuing to invest in itself to develop new skills or products
Cash flow in financing
Shows if the organization is relying too much on borrowing
Financial ratios
- Compares two values
- Results is useful measure compared to benchmarks of financial performance
Argument against excessive use of financial measures
They can overemphasize the importance of short-term results
Current ratio
- Liquidity ratio that indicates level of working capital.
- Creditors prefer a higher current ratio.
Debt to asset ratio
Leverage ratio reflecting the amount of exposure to risk from debt that an organization has assumed.
Debt to asset ratio number greater than 1
Organization has more debt than assets
Accounts receivable turnover
Activity ratio that measures the efficiency of debt collection
Debt to equity ratio
- Leverage ratio reflecting how an organization is funding its growth.
- Varies by industry and strategy type.
Accounts receivable turnover rate meaning
- A higher ratio is preferable
- Ratio that is too high could indicate excessively tight credit policies that could hurt sales.
Gross margin
Profitability ratio showing the percentage of total sales revenue after incurring the direct costs of producing goods and services sold.
Gross margin meaning
The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin
Profitability ratio often used as measure of management performance.
Profit margin
Profitability after all expenses have been deducted, expressed as a percentage of revenue (sales).
Earnings per share (EPS)
Profitability ratio used by equity holders as a standard expression of earnings.
Price to earnings (P/E)
Market value ratio that indicates market confidence in the organization’s ability to maintain or increase earnings.
Current ratio
Debt to asset ratio formula
Debt to equity ratio
Accounts receivable turnover
Gross margin
Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin formula
Profit margin formula
Return on investment (ROI) fomula
Earnings per share (EPS) formula
Price to earnings (P/E) formula
