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Organizational Effectiveness – Best Predictors of Financial Performance

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Who would have thought that the best predictors of financial performance would come from how well the organization manages it Human Assets over and above other Assets.

There are two stakeholder groups who have an interest in predicting the financial performance of an organization:

  1. Investors who are prepared to make an investment today based on future returns on that investment,
  2. Executive Management whose responsibility it is to ensure the future growth of the enterprise and reward investors for their risk.

And then there are two basic forms of Investment Analysis:

  1. Fundamental Analysis evaluates a company’s past performance based on its published financial statements. Many performance ratios are created that aid the fundamental analyst with assessing the validity of a stock, such as Liquidity ratios, Leverage ratios, Activity ratios, Profitability ratios, and Earning ratios. 
  2. Technical Analysis seeks to determine the future price of a stock based solely on the trends of the past price. Patterns are employed, such as the “head and shoulders” or “cup and saucer” and statistical techniques are used such as exponential moving average (EMA), to predict based on past performance.

These methodologies have been developed and used over a number of years and most investors use both forms of analysis when it comes to deciding where they want to invest their money for best return.

Yet the most important predictors of financial performance are not available to either Investors or Executive Management.  The latter because they just have not yet been introduced to the Human Capital Financial Statements (HCF$).

According to research undertaken by the Human Capital Management Institute together with Pepperdine University GSB, the top predictors of financial performance in the future are:

  • Total Cost of Workforce (TCOW), not headcount metrics such as Full Time Equivalent (FTE), and broader than Remuneration Costs.
  • Human Capital ROI Ratio – a productivity related metric.
  • Return on Human Capital Investment – a profitability related metric.

Used together and when calculated correctly, these metrics are superior workforce productivity measures and the truest indicators of both current and likely future productivity changes.  These metrics also, along with a factor for the human capital intensity of the organization, how substantial statistical predictive power and link directly to financial results.

While clearly valuable to all concerned, the single biggest limitation in using and having confidence in these metrics, is solid workforce data.

Most organization have, as part of their Mission statement that their workforce is their most valuable assets.  But it’s also the biggest cost!  What this means is, when the business is doing well, staff are treated as assets, but when this scenario changes and the business is not doing that well, the workforce becomes a “cost” that needs to be cut – and generally in not very constructive or well thought-out ways.

Human Capital, as opposed to Human Resources, is not just a semantic change.  It is an endeavour to view the workforce as assets, no matter the economic environment of the organization.  When cuts have to happen, and no-one denies that this is a reality, would it not be better to know which group of employees provides the greatest ROI?  And then protect this group with strategic Talent Management practices.

All of this is now possible with the Human Capital Financial Statements (HCF$).

To learn more about Human Capital Financial Statements (HCF$), contact us now, and, if you decide to go ahead, you will also be able to benchmark your company against the global benchmarks that have now been set – free of charge!

Don’t wait – time is money!  Call us now.