Traditional human resource management has had the outlook that it is an entirely separate department from accounting. What this approach fails to recognise, however, is the integral role that employees play in making, and keeping, a business profitable. More modern business approaches use strategic human resource management (SHRM) that combines human resources accounting (HRA) with human resource information systems (HRIS).
Why are accounting and human resource management so connected?
Historically, employees have been treated as a business expense. They cost the business money in terms of salary, benefits, workspace, and more. Within this model, traditional HR functions would have little connection with accounting.
More recent research and thinking into human resources, however, has highlighted the need for human resource accounting as a way of boosting the ability of employees to improve business performance.
What is human resource accounting?
Human resources accounting is an important aspect of any business. It is clear and accurate reporting of the costs of employees, including salary, benefits, training, workspace, etc. And it is also clear and accurate reporting of the contribution of employees to the profitability of the company.
In other words, human resource accounting quantifies the economic contribution of employees to the organisation as well as calculating and presents the cost of employees.
Human resources accounting is a new branch of accounting that recognises the two-way impact that employees have on a business. The idea is that human capital is a resource of the business as well as an expense.
For the organisation, human resource accounting can help with strategic decision making about recruitment, allocation, developing, and maintaining employees in a cost-effective way that takes into account cost/value parameters of the business.
What are human resource information systems?
A human resource information system is software that contains data about human resources. This includes key demographic data such as age, sex, dependents, etc. It also contains information about recruitment, time and attendance management, performance data, and more.
Using a human resources information system is the perfect way for any HR department to have a repository of all of the key data about employees and their performance. It is clear how this data is the perfect way of communicating with human resource accounting.
There may also be a place for employees to input their thoughts using a structured self-administered questionnaire which provides data that can be analysed by the system.
The data from human resource information systems can be incorporated into accounting software to be analysed and an accountant can use this analysis to see the impact of different elements of employee factors on the business.
It is also a helpful way of communicating key issues about human resources in a quantitative and evidence-backed way.
Communication between human resources and accounting
Using the data from human resource information systems to communicate key employee issues can allow the business to approach their human resource management in an evolving and dynamic nature. But how does this work in practice? Let’s take a look at one example of how human resources and accounting can work together effectively to improve the performance of a business.
Employee retention is one clear example of how human resource practices can impact the accounting and profitability of a company. Low employee retention will cost any business money, due to having to advertise new staff, the cost of training, and the time it takes for them to become a truly useful member of the team. Performance may also be low because of low morale and dissatisfaction. This can impact customer satisfaction goals and profitability goals.
Human resource practices are essential in improving employee retention. HR professionals are skilled in identifying company-wide issues that could be impacting employee turnover. They will also be able to come up with strategies to improve employee satisfaction. This can include a focus on wellness, improving benefits, looking at work-life balance, among other strategies.
If human resources are kept completely separate from accounting, it may be difficult for this important information about employee turnover to be shared, which can negatively impact both departments. Accounting may be unaware of issues related to employee satisfaction and human resources may be unaware of the impact high employee turnover is having on the company as a whole.
By working together, human resources and accounting can have a clear idea of shared employee goals and the strategies that need to be taken to reach them, with an overarching view of improving the health of the business.
The importance of an HR manager knowing accounting
As well as better communication between human resources and accounting, it is also important for both the HR manager and those in management accounting to have knowledge of each side of the coin, says Auditox Accountancy.
For a human resources manager, knowledge of accounting can help with data analysis, creating and presenting budgets for human resources policies and strategies, and understanding the impact of employee performance on business profitability. Being able to “speak the language” of accounting can help human resources professionals to communicate what they need to help employees, and the costs related to it, in a way that demonstrates the financial benefits to the company.
For management accountants, an understanding of human resources practices and how employees are performing and feeling can help them to better understand the areas of profitability that need to be addressed for the company. With this knowledge, they can improve performance, implement strategic decision making, and have clearer measures of the employee side of the business.
The bottom line
Gone are the days when human resources were viewed as completely separate from accounting. New strategic human resource management theories demonstrate that human resource management is key to improving employee retention, performance, and satisfaction, and these human capital factors can have a profound impact on business health and productivity. Bringing the HR department in line with the accounting aspect of the business is a successful strategy that more and more companies are implementing to the benefit of the company as a whole.