Most people traditionally think of HR and Finance as two very different company departments; the former handles the organisation’s workforce, while the latter handles its finances. However, the two are more closely connected than you might think.
In this article, we’ll explore how to drive HR and FP&A collaboration to get a clearer picture of your company’s financial standing and thereby drive better strategic decision making.
Connecting Human Resources with Financial Planning and Analytics
HR departments, by default, keep very tight records of all employee-related costs. “Across most industries, employee expenses make up the majority of a company’s outgoings,” says Apliqo CEO Daniele Tedesco. While these costs may vary across different geographic regions and industries, some key employee-related expenses and HR metrics include:
- The allocated employees per company department
- Management level
- Employment start and end dates
- Gross salaries
- Full-time vs part-time employee percentages
- Departmental incentive plans
- Social security costs
- Employee oncosts
- Fringe benefits
- Tax withholding
Not only do HR teams keep tabs on all of these factors, but they also possess a deep understanding of the current state of employee-related costs and how they might change in the future.
“Finance, on the other hand, usually doesn’t have access to these kinds of details or to the relevant data needed to measure them,” says Daniele. Moreover, finance departments typically lack the knowledge to not only properly assess these cost drivers, but also understand how they may change in the future.
All of a sudden, the need for HR and Finance collaboration might seem a lot clearer. After all, the role of FP&A is to help key decision makers understand their organisation’s performance and spot opportunities to improve it. And doing so without a clear view of the company’s biggest asset and expense driver is nothing short of impossible.
“Having a thorough understanding of HR expenses plays a critical role in forming a comprehensive perspective of an organisation’s financial costs and controls,” Daniele says.
By providing key insights into the company’s biggest expense driver, HR can help FP&A professionals produce more accurate reports and analysis of the organisation’s performance.
Moreover, HR teams can use their unique skill set and knowledge to spot material changes to drivers such as pay increases or social security contributions, for example, and communicate them to Finance to reflect/simulate those changes in their reports and projections.
Finance, in return, can then incorporate HR into its reporting processes and provide more transparent insights into the organisation’s functioning.
What are the benefits of HR and Finance collaboration?
Bringing finance and HR closer together doesn’t just bring more transparency to the planning and analysis process; it can also have huge strategic benefits for your organisation.
On one hand, understanding and nurturing the connection between HR and your company’s strategic vision can drive immediate results, such as identifying top performers across the company, evaluating turnover risk, promoting human capital forecasting, and creating shared resources between HR and finance.
Moreover, HR and finance collaboration also helps infuse your organisations reporting and planning with previously unavailable data. This is something we see consistently among top-performing companies; by bridging the gap between HR and Finance, these organisations are able to rely on unique data that allows their managers and key stakeholders to make better business decisions.
“Instead of merely reporting on what happened and why, top-performing companies use shared data from HR and finance to look forward with predictive analysis that address strategic matters hidden in the blurred lines between the two departments,” says Daniele.
Lastly, one of the biggest benefits of HR and Finance collaboration involves relieving tension. Because Finance and HR share many responsibilities, encouraging open communication across the 2 departments is key to ensure a more streamlined workflow, and, even more importantly, a cohesive approach to pushing the organisation towards meeting its goals.
On the other hand, a lack of cooperation and collaboration between Finance and HR can hinder company growth and performance, as well as harbour reporting and planning errors that result in misguided strategic decision making.
4 tips for successful HR Management to help your organization avoid financial surprises
Understanding the benefits of bringing HR and Finance closer together is one thing. But knowing how to take actionable steps to start building a connection between these traditionally separate departments is a whole other board game.
To help your organisation bridge the gap between HR and Finance to bring more transparency to your reporting and analysis as well as avoid HR-related financial surprises, Daniele Tedesco suggests:
1. Driver Integration. The first step to solid collaboration between HR and Finance is to understand the key HR drivers relevant to your financial model. This can include the drivers listed above, but will really vary based on your company’s location, organisation, and industry.
2. Standardised HR reporting model. Next, you’ll need to build a standardised group-wide reporting model that tracks all the relevant KPIs and drivers you identified in Tip #1.
3. Incorporate HR into the planning process. Your FP&A team should allow HR to play an integral role in planning by letting the department drive its base data. This promotes transparency which ultimately drives better decision making.
4. Unifying data. Unfortunately, HR and Finance often struggle to share common data. People may well be your organisation’s biggest asset, but HR is notorious for lagging behind in making investments in automation and systems, which can translate into a high margin for error in your financial reports/plans. In order for HR and Finance to collaborate smoothly, both departments need to be working with an underlying set of shared data.
Traditional thinking might leave us with the notion that Finance and HR are separate entities within an organisation. However, uniting the two really drives the potential for companies to make better and smarter strategic decisions.
As we saw in this post, Finance and HR really work better together. By identifying key HR drivers, standardising their reporting, unifying data, and incorporating HR into the FP&A function, we’re able to draw a clearer picture of our company’s performance and better understand one of its biggest assets; people. By driving HR and Finance collaboration, our financial plans and analysis also become more transparent, allowing managers and other company executives to make more informed strategic decisions.