Importance of HR Accounting
There is no undermining the value of Human Resource in any organization. To quote Narayan Murthy founder of the ‘IT Giant’ Infosys, “My assets are not the buildings, the business or foreign contact. My assets walk out of the gate every evening and I wait for them to come back to me the next morning.”
Human Resource is the greatest asset of any organization and like any other asset it needs to be accounted for. And this is even more so in the Service-based organizations where instead of a tangible product there is an intangible product i.e.: service to offer and hence the conduct and approach of the employees assumes greater importance. Human Resource Accounting (HR Accounting) may be a new term for a lot of small businesses since most view their employees as asset but forget that there is a real tangible cost associated with obtaining these assets and also maintaining the asset to ensure a long and loyal life.
At the end of the day the employees of an organization can provide a competitive advantage and add to the ultimate profitability. This is precisely why HR Accounting comes into play.
Broadly speaking HR Accounting is two faceted. On one side, it involves measuring the costs and investments associated with employee acquisition, employee development and employee retention while on the other, involves quantifying the economic value of the employees in an organization.
Internal Perspective On the internal front HR Accounting primarily supports the top level management to do a cost-benefit analysis of their HR decisions. A lot of monetary resources are used to acquire, nurture and retain employees and hence the indispensable need for HR Accounting.
For instance, often HR executives are faced with a choice between hiring talented individuals with the necessary qualifications from outside and providing the required training to an employee from within. HR Accounting can help tackle these issues. HR Accounting is also crucial for performing functions like recruitment, selection, training and development, motivation and performance appraisal of the employees.
External Perspective From the perspective of the impact of HR Accounting on a external front, HR Accounting helps investors make rational and logical decision when they are assessing the total worth of an organization. The explanation to this is pretty simple. We need to remember that traditional business accounting treats Human Resources as expenditure in their income statements in any current year. When an investor is reviewing these expenditures, they also need to see how the business view their employees as assets and are being accounted for in the financial reports as such. As a small business, if you are seeking investors you need to discuss the possibility of having your employee expenditures moved and being treated like any other physical asset and capitalizing it over its expected useful life. This will allow the final balance sheet to show a more accurate number since following traditional accounting practices the expenditures may be overstated and assets are understated. Each business’ financial situation is unique unto itself, therefore before changing any accounting practices be sure to speak with your certified public accountant.
HR Accounting is a relatively new approach to accounting and a way to financially embrace the importance of HR. With today’s competitive environment HR Accounting is becoming an essential accounting tool for the long term success of any organization, big or small. Depending upon the size and anticipated growth of your business, you may want to begin considering the adoption of this practice, as it may just be the key for the long term financial health of your business.