In an earlier life, I was a financial analyst at the HQ of a Fortune 50 company evaluating business plans, R&D projects, new ventures, acquisitions and capital investments of all types. Later on as a recruiter I placed hundreds of people in leadership roles, including sales, operations and logistics where an understanding of financial decision-making was an essential skill. This newsletter will help HR professionals embrace this type of financial thinking as part of an on-going series of webcasts, “Moneyball for HR!” and our series of complementary LinkedIn Learning programs.

In fact, I’ll make the bold contention that the ability to think like a CFO will become the new HR super skill driving career growth and personal satisfaction. Money is the universal language in business, and HR leaders must become fluent in it. This involves moving beyond just considering the budget to understanding the broader financial implications of our decisions. For most companies, labor costs represent the single biggest expense, accounting for 30-50% of total expenses. To me, optimizing this spend should be the primary focus of HR leaders, not just figuring out how to budget it properly.

A Long-Term Strategic Approach

Adopting a CFO mindset requires a long-term strategic approach. When making HR-related decisions, it’s important to consider the broader financial picture and the potential ROI. For example, hiring 100 new employees at an average salary of $150,000 each represents a $15 million investment. If the average revenue per employee is $750 thousand per year, these new hires represent $75 million in annual sales and potentially $30-40 million in variable profit. Given this, it’s important that this money is spent wisely with as much discipline and analysis as any major capital investment or new venture.

Start with a Pilot Program to Collect the Evidence

It’s always best to conduct some type of pilot program to determine the business impact of any change program. For example, if you want to implement a new training program for managers on how to improve their hiring decisions run a small test comparing the new approach versus the old. Then collect evidence that it’s effective like fewer hiring mistakes, more accurate predictions, higher satisfaction scores, fewer candidates for each hire and more candidates accepting offers. But this is not enough to move forward and it’s much more than statistics. You now must quantify the results in some meaningful way to convince others of the merits of the project.

Quantify Options and Calculate the ROI

To compare different HR options effectively, we must translate them into financial terms and calculate their return on investment (ROI). Two useful metrics for this purpose are Revenue per Employee and Variable Margin per Employee. For instance, consider an initiative to improve employee training. By estimating the increase in revenue or profit that each employee generates post-training, we can determine the initiative’s ROI and compare it with other potential investments. In the case of the hiring project above, you could consider the costs of a bad hire in comparison to the impact of a good hire. Then scale this financial impact companywide.

Focus on Direct and Opportunity Costs

Direct costs, such as salaries, benefits, and training expenses, are straightforward to quantify. However, opportunity costs are equally important and often bigger. Opportunity cost refers to the potential benefits an organization misses out on when choosing one option over another. For example, delaying a new wellness initiative might save immediate costs but could result in more turnover and decreased productivity. In the hiring example above, consider the cost of a hiring mistake not just as the cost to replace the person and their direct compensation but the loss of the positive impact the person could make. For a sales rep this is huge and easy to calculate. For someone in the purchasing department it could be their ability to reduce costs and for someone in the R&D group it could be developing a product that provides a competitive advantage, or missing out entirely. Business executives always think this way. HR leaders must, too.

Conduct Cost/Benefit Analysis

A comprehensive cost/benefit analysis helps to evaluate the financial impact of HR decisions. This involves listing all potential costs (direct and indirect) and benefits associated with each option. By comparing these, we can identify the most financially advantageous choice. For example, implementing a program to improve satisfaction and productivity might have significant upfront costs but can lead to long-term savings and increased efficiency. One way to quantify this and calculate the ROI is to convert any gains in productivity into fewer new hires.

The Strategic and Financial Perspective

While the above is just a sampling of ideas, thinking like a CFO involves viewing HR decisions through a strategic and financial lens. This approach allows HR leaders to present their decisions in terms that resonate with other executives. By framing decisions in financial terms, we can more effectively convince stakeholders of the value of HR initiatives.

Understanding the big picture impact of HR decisions, especially when quantified in financial terms, is crucial. It ensures that HR leaders not only have a seat at the strategic table but are also able to lead the conversation. By thinking like a CFO, HR professionals can drive significant value for their organizations, aligning HR initiatives with broader business goals and financial success.