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Finance, talent management go hand in hand

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What does an organization's talent management strategy have to do with its financial performance? After all, human resources and accounting rarely spend much time together.

But talent management extends well beyond human resources. And besides, a company doesn't exist without the people who run it.

In his research in finance and talent management, Mike Gunderson, associate director of Purdue's Center for Food and Agricultural Business and an associate professor of agricultural economics, has found that agribusiness professionals often see their chief financial officers as no-nonsense people who are solely focused on numbers.

While the research shows that nothing is more important to a company's bottom line than talent, this employee perception of CFOs can make it challenging to communicate about things like leadership, people skills and talent management.

One reason has everything to do with financial paperwork, Gunderson said.

"Accounting hasn't designed financial statements—income statements in particular—to measure the role of talent in creating and capturing customer value in an obvious manner," he said. "When analyzing financial operating performance, CFOs and analysts focus on the return on assets. The assets represent investments primarily in physical resources, such as inventory, plant, property and equipment. Less often do CFOs and analysts publically use financial metrics related to the role of talent in creating returns."

Return on assets is the operating profit margin multiplied by asset turnover. According to Gunderson, talent management affects both of these ratios, with the impact on sales being the most obvious.

All income, or P&L, statements start with the revenue at the top, with revenue measuring the total value created and captured by the organization. Gross margin, which is the value created and captured above organizational costs, is calculated by subtracting the cost of inputs from the revenue.

Next on the P&L statements, talent management comes into play. Employee salaries are typically expensed as part of the sales, general and administrative expenses, or SG&A, which also includes marketing, advertising, utilities, insurance, property taxes and fleet maintenance—among others. Also factored in to the P&L statements is the cost of long-term depreciation of assets. Once those costs are removed, what's left is earnings before interest and taxes, or EBIT, which is the operating income.

According to Gunderson, while the math would suggest that improving return on sales would require reducing the SG&A expenses, doing so could cause organizational performance to suffer.
"In an economist's world where we can hold all other things equal, reducing SG&A expenses is a mathematically certainty," he said. "Unfortunately, things are not likely to remain equal when we reduce SG&A. Reducing that means either laying off employees or cutting salaries across the board. I doubt that either reduction would result in revenue remaining the same."

Instead, Gunderson said, improving return on sales means optimizing SG&A expenses. Enter talent management. Proper talent management is all about maximizing the revenue generated per dollar of fixed expense.

Using ratios that show the amount of revenue per dollar of salary or revenue per worker could show the ability to optimize SG&A expenses through employee incentive programs and other performance-based rewards.

"Expenditures on employees will have varying impact on their motivation and engagement," Gunderson said. "Commission programs that focus on rewarding performance with cash could appear to be the obvious choice for motivating and engaging employees. Why, then, do so many organizations invest in trips to reward high-performing employees? Perhaps dollars invested in trips have ancillary benefits that are hard to capture in the no-nonsense CFO's numbers.

"After all, not everything that can be measured matters, and not everything that matters can be measured. If this weren't true, there would be no need for managers."

Agribusiness Finance for Non-Financial Managers

Gunderson and other researchers within the Center for Food and Agricultural Business are researching the roles of talent management in business success. One of their key findings thus far is that when employees of an organization highly rate performance management processes, the organization is likely to have stronger performance relative to its peers.

The center's Agribusiness Finance for Non-Financial Managers program includes a discussion on the relationship between talent management and company financial performance. Other program topics include thinking like a CFO, financial statements, financial evaluation, financial concepts—profitability analysis and financial management—practical tools for examining profitability.

Learn more and sign up today at http://agribusiness.purdue.edu/seminars-and-events/agfinance.

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