Walk Down Acknowledgment Lane: How Finance, Operations And People Are Equal
Updated: Oct 5, 2022
Christine Wzorek | Forbes Councils Member
Business-minded people tend to distinctively separate finance, operations and human capital activities. The distinctive separation is pervasive in academia, where CFOs are taught to view people as a liability, where students of operations are taught how to configure productivity ratios without any regard to the people (and their influencers) generating the products and where organizational behavior/human resource studies give almost zero regard to financial or operational functions.
The result is a lackluster and misguided attempt at profit capitalization because, from each functional vantage point, an incredible amount of potential lies untapped on the table.
Turning Potential Into Profits Via Leading And Lagging Indicators
Human behaviors are drivers of positive and negative outcomes. Choices employees make can ensure the success or failure of a system, process or the product itself, whereas typically product development, sales/marketing efforts and operations do not account for the human element of product creation, development, deliverables and revenue growth.
In the most raw and unrefined form, it is people within an organization who create and produce products and deliverables.
To understand if it is time to deviate from generally accepted, and rather institutionalized, ideas about profit capitalization and start to place tangible merit on the influential inlays of the human element, we must explore prominent correlations in what are called leading to lagging indicators as they relate to business.
Lagging indicators reflect what happened in the past. The vehicle to lagging-indicator analysis is financial statements. Financial statements are simply reporting on what has happened, whether it was last month, last quarter or last year. If there are lagging indicators, there must be leading indicators that drive the activities to create the deliverables being reported on.
Leading indicators are a real-time reflection of the products deliverables being produced now. They should be designed to provide the right drivers to produce desirable lagging indicators. This is where the human element shines because it is here, in the beginning, that leaders can truly develop their businesses by setting the optimal culture through clarity in standards, policies and procedures, enhancing employee performance and productivity. What is interesting about the outputs employees generate is their response to culture, practices and policies implemented by the organizations they create the deliverables for.
Attention to the human element is the genesis of how leading indicators deliver robust lagging indicators.
This is the first intersection, where the functional vantage points of finance, operations and people become one. Masters of accounting, business administration, or OB/HR programs are often not teaching it — but it is time start acknowledging it.
For entrepreneurs, CEOs, CFOs, COOs, CHROs and equivalents, the challenge is to begin understanding that the financial results you are seeking directly and inherently lie in establishing a productive culture that is well-educated and versed through transparency on the financial metrics you measure success by. Communicating your success metrics and offering transparency into what your EBITDA expansion goals are will ignite your people, and in turn, your operations, to achieve those results, aka transform your untapped potential.
Productivity Is A Variable Factor, Not An Assumptive Constant
As stated, it is people within an organization that create and produce products and deliverables. They are in a productive state because of the work that's required.
Financial models typically represent productivity in terms of manufacturing output by factoring productivity ratios such as the following:
• Current asset turnover: net sales/current assets.
• Fixed asset turnover: net sales/fixed assets.
• Total asset turnover: net sales/total assets.
Labor models typically represent productivity in terms of output/input.
Is this the best way for businesses to measure our productivity in manufacturing and labor? Or can we begin to break it down to identify critical links and realize profit capitalization in new ways?
This is where the human element needs true factoring into financial models: Without measuring the productivity of deliverable output, we are inaccurately assuming output forecasts, revenue forecasts, etc. with a 100% fixed productivity rate, when in reality, it is a much lower variable. Easily defendable is this fact: If the culture is failing, productivity is severely reduced, negatively impacting forecasts and causing financial disruption.
Improving Productivity Via Asset Retention As A Result Of High Employee Engagement
If people are generating our products and deliverables and are in a productive state, shouldn’t we then consider them assets? And, if they are assets, what is our asset-retention strategy, and what tools will we use to accomplish an optimum level of asset retention?
The optimum level of asset retention is achieved as a result of high employee engagement. At its core, employee engagement is productivity stated in nonfinancial terms. It is the linking metric between finance, operations and human capital.
Through this acknowledgment and understanding, business professionals can cohesively integrate the three core functional areas of the business to realize the incredible amount of potential waiting to be gained.