Cash Flow Analysis in Strategic Human Resources Management

The critical relationship between strategic human resources planning, project life cycle,

and financial measurements.

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How to build a cash flow for strategic human resources

planningThink in terms of when your company gets cash in and when do we have to pay the cash out.

That’s how you begin to build the cash flow statement in your strategic human resources planning process

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Profit and cash floware not the same

Profit- revenue minus cost. It's the bottom line. It's also referred to as net income or net earnings. As a percentage, it's

called the profit margin. Net profit margin is

profit after all costs (fixed, one off, and cost of sales)

Gross profit margin covers only the cost of sales.

Cash flow-cash (revenue) generated by your operations (key business activity) with adjustments for liabilities, receivables, and deprecation

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Profit is not equal to cash

Why? Depreciation, which spreads the cost of an

asset over a time period, is counted towards profitability. You don't actually pay that out to anyone.

Cash only comes in when payment comes in. You might sell an item and have revenue today, you may not receive the payment for another 30 days

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Strategic human resources decisions need to be

made on a level plane Discounted cash flow analysis levels the plane. This formula works out revenue in the future and says, what is that revenue worth to us today? You want to always be comparing dollars in the same time frame The interest rate that you use has a significant

impact those present value dollars are, the higher the interest rate, the lower the present value is going to be.

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Hurdle Rate in Strategic Human Resources Management

The hurdle rate is your company’s cost of capital

You use the company’s cost of capital or “hurdle rate” as the interest rate in your discounted cash flow calculations

Use that same hurdle rate or cost of capital when you calculate the present value for your ROI analysis whether it involves purchasing capital or not.

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Inflow versus the Outflow

The revenue collected(inflow) less the expenses(outflow) that are being generated or paid out by the business.

This is really a balance and timing issue.

For example, you may buy materials right now but we might not pay for them for another 30 days. You may incur labor costs today but you don't actually pay the money out for two weeks

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Cash flow measures the company’s health

It’s a key decision criteria in strategic human resources planning and allocation

When calculating ROI, we're trying to say, “Fund my project. My project is the one that will provide the greatest benefits to company.”

When calculating the cash flow, we’re saying, “This is when we will see the cash from the project.”

Keep in mind only cash can be spent. Profits are important - look at the actual cash flow when making the decision.

CASH FLOW IS THE CASH YOU HAVE TODAY

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A cash flow to profit comparison in strategic

human resources planning Here is an income statement for a company at the end of December. They have revenues of $150,000. They had expenses-materials and salaries of $120,000. They show a profit of $30,000. From a cash flow standpoint, they haven't actually been paid for the $150,000 worth of sales. So, they extended credit terms.

They had to pay for their raw materials. They had to pay their employees. There was a cash outflow for the total amount of the expenses of $120,000, which means from a cash flow standpoint, they're short by $120,000.

 

In 30 or 60 or 90 days from now when that cash comes in, that will balance out. But it's important to keep in mind that cash and profit are different. And we're going to be looking specifically at cash flow.

Income Statement 12-31-09

Ops Revenue +150,000

Expenses -120,000

Profit =30,000

Cash Flow 12-31-09

Expenses(due now) -120,000

Revenue due 3-31-10 150,000

-120,000 cash flow for 12-31-09

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