I wasnt sure the CFO and HR Director are best friends in the first place. But lately they probably dont have much of a choice. Sky rocketing wages in China (and in many parts of Asia) means that what were two "seperate silo"s just have to work much more closely together. So they became close tennis buddies...but figured they dont even speak the same language. Attached the latest HKIHRM seminar on corp fin conducted for HR professionals. Also reran in Chinese for Shanghai University MBA Students. This is released as part of a series hosted by my partner Steve Chow

1. Practical finance applications forPractical finance applications for
HRHR
- and why it is business critical- and why it is business critical
Philip ChowPhilip Chow 周子诺周子诺
tms.philip.chow@gmail.comtms.philip.chow@gmail.com
http://t.qq.com/tmsphilipchowhttp://t.qq.com/tmsphilipchow
tmsphilipchow.blogspot.hktmsphilipchow.blogspot.hk

2. “The Strategic Talent Management Model”
Corporate Branding
-Best practices
- public recognitions
- local /overseas awards
- publicity in medias
- Icons
Succession Planning
-Hi performers
-Career choices
-Development programs
- Sr mgt mentorship
- BSC w/ KPIs
- Assessment
panel
- mentee >
mentor
-
Strategic Partner
-BD involvement
-L&D / Performance
review provision
- Service, OD models
-BSC, KPIs
- strategic workshop
- strategy /culture map
-Staff survey
Training &
Development
- technical & mgt
competence analysis
- training curriculum
- project mentoring
- mgt process models
-- certification & awards
Com and Ben
-Market intelligence
-Reward for the
best
-Educate and outplace
worst
- continuous reward
the best
- retention
Performance Review
-BSC and competence base
- career planning
- rating/feedback
t standardization
- hi/lo performers
- continuous
monitoring
Recruitment
-Job description
- structured interview
- interview template
- assessment centers
and tool
-S r. mgt buy-in
- performance follow
up
Competence
Compensation,
performance review
– HR meets
Finance

3. Some basic definitionsSome basic definitions
Sales Expenses Profits- =
Salaries
People cost
Non-people cost
Traditionally HR’s key concern…

4. Figures in HK$ millions
TV Station and Furniture MakerTV Station and Furniture Maker
Salaries 1,533 687
Total expenses 3,261 3,177
Salaries as % of
expenses
47.0% 21.6%
TV Station Furniture Maker
Q: Assuming a 5% increase in salaries, which
company will suffer a steeper decline in
profits?

5. +5% salaries -77 -34
New profit 2,110 65
Fall in profit -3.5% -34.7%
Sales 5,448 3,276
TV Station Furniture Maker
Salaries 1,533 687
Total expenses 3,261 3,177
Salaries as % of
expenses
47.0% 21.6%
TV Station and Furniture MakerTV Station and Furniture Maker
Profit 2,187 99
Profit margin 40.1% 3.0%
Same answer?

6. +5% salaries -77 -34
New profit 2,110 65
Fall in profit -3.5% -34.7%
Sales 5,448 3,276
TV Station Furniture Maker
Salaries 1,533 687
Total expenses 3,261 3,177
Salaries as % of
expenses
47.0% 21.6%
TV Station and Furniture MakerTV Station and Furniture Maker
Profit 2,187 99
Profit margin 40.1% 3.0%

7. Operating leverage

8. How salary rise affects profit depends on
◦ Salaries as % of total expenses
◦ Operating leverage/company profit margin
A life-and-death gatekeeping roleA life-and-death gatekeeping role
Port terminal 34.8% 15.3%
Margin %
Salaries as %
of expenses
TV station 40.1% 47.0%
Restaurant 8.8% 29.4%
Property agency 11.3% 61.6%
Export factory
Fall in profits
if salaries +5%
3.0% 21.6%
-1.4%
-3.5%
-15.3%
-24.2%
-34.7%

9. “The Strategic Talent Management Model”
Corporate Branding
-Best practices
- public recognitions
- local /overseas awards
- publicity in medias
- Icons
Succession Planning
-Hi performers
-Career choices
-Development programs
- Sr mgt mentorship
- BSC w/ KPIs
- Assessment
panel
- mentee >
mentor
-
Strategic Partner
-BD involvement
-L&D / Performance
review provision
- Service, OD models
-BSC, KPIs
- strategic workshop
- strategy /culture map
-Staff survey
Training &
Development
- technical & mgt
competence analysis
- training curriculum
- project mentoring
- mgt process models
-- certification & awards
Com and Ben
-Market intelligence
-Reward for the
best
-Educate and outplace
worst
- continuous reward
the best
- retention
Performance Review
-BSC and competence base
- career planning
- rating/feedback
t standardization
- hi/lo performers
- continuous
monitoring
Recruitment
-Job description
- structured interview
- interview template
- assessment centers
and tool
-S r. mgt buy-in
- performance follow
up
Competence

10. Sales as a KPI –how to cheat…Sales as a KPI –how to cheat…
Sales 2,704 2,076 +30.3%
2010 2009 Change %
Profit 272 226 +20.2%
Profit Margin 10.06% 10.91% -0.84%
Net assets 2,303 1,518 +51.8%
Good year for company M. Sales +30%
CEO asks Chairman for performance bonus
Should he get it?

11. Sales as a KPI –how to cheat…Sales as a KPI –how to cheat…
Sales 2,704 2,076 +30.3%
2010 2009 Change %
Profit 272 226 +20.2%
Profit Margin 10.06% 10.91% -0.84%
Net assets 2,303 1,518 +51.8%
Profit increase less than sales increase
“Cheating” with expenses

12. Sales as a KPI –how to cheat…Sales as a KPI –how to cheat…
Sales 2,704 2,076 +30.3%
2010 2009 Change %
Profit 272 226 +20.2%
Profit Margin 10.06% 10.91% -0.84%
Net assets 2,303 1,518 +51.8%
Performance measurement
should also refer to profit margin

13. Sales as a KPI –how to cheat…Sales as a KPI –how to cheat…
Sales 2,704 2,076 +30.3%
2010 2009 Change %
Profit 272 226 +20.2%
Profit Margin 10.06% 10.91% -0.84%
Net assets 2,303 1,518 +51.8%
Assets +50% - e.g. 50% bigger factory;
+50% uncollected cash from customers

14. What is wrong with more assets?

15. Collecting CNY5,950mil means
Interest income of 200mil per year from bank
deposits
Interest expense savings of 400mil per year – if
used to repay debts
Use cash for business development – returns
= ????
Opportunity costs! All things equal companies
should strive to be asset light…
AA certain PRC company’s accountscertain PRC company’s accounts
receivables – ie. Uncollected cashreceivables – ie. Uncollected cash
22,720m CNY 16,770mil +5,950mil
2012 2011 Change

16. Sales as a KPI – how to cheat…Sales as a KPI – how to cheat…
Sales 2,704 2,076 +30.3%
2010 2009 Change %
Profit 272 226 +20.2%
Profit Margin 10.06% 10.91% -0.84%
Net assets 2,303 1,518 +51.8%
Return on
net assets
11.82% 14.92% -3.10%
Performance measurement should
refer to return on net assets too
Assets +50% - grew faster than sales and profit
Should be penalized

17. Sales as a KPI – how to cheat…Sales as a KPI – how to cheat…
Sales 2,704 2,076 +30.3%
2010 2009 Change %
Profit 272 226 +20.2%
Profit Margin 10.06% 10.91% -0.84%
Net assets 2,303 1,518 +51.8%
Return on
net assets
11.82% 14.92% -3.10%
Performance measurement should
refer to return on net assets too

18. Some basic definitionsSome basic definitions
Profit
Net assets
Return on
net assets
____________
=

19. AP Moeller Maersk – World’s #1 shipping
company
Returns as a KPI – widely employedReturns as a KPI – widely employed
by MNCsby MNCs

20. ConclusionConclusion
Operating leverage – A small increase in
salaries can completely wipe out profits
Setting KPIs – Sales growth is easy to cheat!
Refer to expenses and assets also

21. Where do I find all these?
Sales
Profits
A variety of
expenses,
some other
items too

22. Where do I find all these?
Usually “hard”
labour – e.g.
factory
Head office costs,
salespersons, etc

23. More details in the footnotes

24. Directors’ rewards as well…

25. Assets/Liabilities on the balance sheet
Assets Liabilities Net assets- =

26. Other topics I talk about…Other topics I talk about…
Capital raising – China and overseas
Best investor relations practices
Cyclical industry analysis