Assessing Your Company's Training Needs - The Professional Way
by Gustavo Bilbao
As a Leadership and Management consultant, I often get asked for advice from colleagues both in the Learning & Development, as well as the Human Resources space. One of the things I noticed is that most of these professionals don’t know how to gauge the training needs of their organizations in a factual manner. In most cases, they don’t even know how to measure the results, and the impact the training had on the business. And that is what I want to talk about in this article, how to measure training impact in a business-like way, so you can impress the board of Executives with your factual, professional approach.
There are many mindset elements that separate Executives from non-executives, one of the most fundamental ones is that Executives always make decisions based on facts and evidence, never on opinion and emotion. The realization of this, is critical to your credibility. Approaching an Executive requesting funds without facts, basing the request on opinion is well… just short of career suicide.
How is this applicable to our topic? Most L&D and HR professionals rely on anecdotal information coming from managers on the floor to adjust, support or improve performance. And while this seems to be the most commonly accepted practice these days, there are three fundamental flaws with this approach that put the L&D and HR professional in a precarious situation:
1) The decision is based on opinion (of the manager/s)
2) It puts the L&D or HR professional on a passive and reactive way
3) It makes you appear unprofessional in the eyes of Executives when they make decisions (and/or take action) based on opinion
Fortunately for all of us, there is a simple way to avoid this level of unprofessionalism:
Financial Analysis.
Why Financial Analysis? For a number of reasons:
1) You need facts
2) Numbers don’t lie
3) Numbers always tell a story
4) The numbers will highlight deficiencies, and even more, pinpoint specific areas
5) You need your training (like everything else) to be measurable
Now, every time I mention financial analysis, people imagine a dark room, a green shade desk lamp and green shade visors. The good news is that you don’t need any of that to be able to read numbers out of a financial statement! and even better, you don’t even need an MBA to be able to interpret them if you know what you’re doing, count on good advice, or you are knowledgeable training consultant shows you how to do it.
All you need to be factual and impress your Executives are several financial statements (current, past period and the past year’s), the balance sheet two hours of time, and a plain calculator. This might seem like unattainable information, but your friendly finance team can provide you with these documents if you offer them a nice cup of coffee.
Financial statements are the most credible tool at your disposal to understand and analyze the performance of your company. As Human Resources or Learning and Development professional, you don’t need to be an expert financial analyst, but the most basic understanding of these statements will give you the facts you need to anticipate floor managers in knowing how both the functions, and the individuals are performing. The results of your quick analysis will tell you in black and white what is missing in terms of skills, training and motivation as we will see shortly. Carry on reading.
Once you identify the strengths and weaknesses of the various functions and individuals, this information will greatly help you identify what the rational and factual budget should be for the training/consulting fees, in order for it to be cost effective and justifiable. As you will see, this analysis moves you away, and prevents you from making decisions based on opinion and emotion, and this fact will impress your boss and the board.
For example, let’s say you notice that the Operations department has paid $170,000 on recruitment fees due to employee turnover. You then look at the same period last year, and in the last couple of periods and find out that on average, the cost has been of $120,000. You identified a negative spread of $50,000. You know you need to do something to help your organization and wonder if Leadership training is going to help reduce these costs, but you don’t know by how much. Here are your options:
· Your best outcome is to lower the fees to below $120,000 and keep it there for the balance of the year and into the next one
· Your mid-level outcome is to bring the costs back to $120,000
· Your next worse outcome is to do nothing
· Your very worst outcome is that you hire a consultant to deliver Leadership training, overpay for the services, and the costs don’t go down (sadly, this last one is the most common scenario)
Of course, you want the best outcome scenario, but how much should you pay to be able to justify the expense? This seems to be the hardest question to answer.
Senior Executives understand very well that the purpose of a business is to generate cash (flow in), and they also understand return of investment. So, if you are going to invest, you need to have a clear financial return on it (yes, even on training! training is not an expense, training is an investment!). Here is how you price the value of the Leadership training you need:
You want to close the $50,000 negative spread and lower the recruitment expenses going forward to around $100,000 for each period, which will save you $70,000. So, in order to justify the training investment, you should allocate 10% of the desired savings. In this case, your budget for leadership training is: $7,000. You invest $7,000 and make $70,000 in savings. Any Senior Executive will be able to quickly see the benefits of such investment because it makes perfect commercial sense.
Having done this scientific analysis, you will now be in the perfect position to really measure the effectiveness of the training delivered. If in subsequent financial periods, the recruitment fees remain below $100,000 then you can demonstrate that the training has been successful. This result will provide you with an opportunity to show this success to the Senior Executives who will be very pleased with both, your professional approach and your business decision, which will earn you their trust and respect.
There are more benefits to it. This analysis will equip you with enough knowledge to be able to assess the quality of the training consultant you hire.
Let’s get into some of the most common examples of financial analysis that can help you with your training decisions:
Assessing Your Human Resources performance:
An easy way to assess the overall performance with one quick calculation is by identifying the sales per employee and the net income per employee. These numbers can be found on the income statement and they provide you with very good information about the overall efficiency of your organization.
To find out the sales per employee, you need to divide the sales figure by the number of employees in your company. To find out the net income per employee, simply divide the net income figure (also on the income statement) by the total number of employees.
Next you need to do the same calculation for the last two periods and with the same period from last year, and if your recent numbers show a downward trend, the income statement is shouting at you that currently, your human resources (employees) are not being efficiently managed. Your final confirmation to this analysis is to get hold of industry specific information on this respect and compare the numbers from your income statement against the corresponding industry numbers (including those of your competitors if you can). This will give you irrefutable facts about your company’s use of employee resources. (There are many resources online that can help you find industry data, rates and even financial ratios).
SUGGESTED TRAINING IN THIS CASE: Personal Productivity, Leadership, Motivation, Strategic Planning, Eliminating Organizational Bureaucracy, Six Sigma.
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Assessing the Finance Department’s Performance
One of the many ways to look at the Finance’s department performance, is to analyze working capital (found in the balance sheet), which measures an organization’s ability to pay its current financial obligations. For example, let’s take a look at working capital for a fictitious company call Acme in 2017 vs 2016.
2017 Working capital: $8,600,000
2016 Working capital: $8,170,000
2017 Sales: $22,000,000
2016 Sales: $20,240,000
These numbers clearly show an improvement for Acme Company’s working capital in 2017 by $430,000 or 5% ($430,000 ÷ $8,600,000). This 5% increase occurred while sales increased by about 8%. Since working capital should grow at about the same rate as sales, this shows good financial management.
SUGGESTED TRAINING IN THIS CASE: Six Sigma, Economics 101, Basic Leadership.
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Accounts Receivable (A/R) Turn Over
It normally is alarming when receivables are slow. In plain English, this means that it takes the company longer than it should to collect its money from customers. This is alarming because if the market takes a dip, slow receivables will most likely become slower and even uncollectable which poses a serious risk for everybody.
This is how you analyze the accounts receivables turnover:
A/R turnover = Sales ÷ Average accounts receivable
You’ll find the sales figure on the income statement. You calculate the A/R turnover by adding the accounts receivable at the beginning of the period (from the first balance sheet) to the accounts receivables at the end of the period (from the second period) and divide the sum by two. Then you take the total sales number for the period and divide this number by previous result:
First Balance Sheet: $4,000,000
Second period: $3,800,000
($4,000,000 + $3,800,000) ÷ 2 = 3,9000,000
(Total Sales:) $22,000,000
A/R Turnover = $22,000,000 ÷ 3,9000,000 = 5.6
A/R turnover = 5.6 times
You want a higher turnover, this is because the quicker the receivables are turning, the more cash that is coming to your organization, hence the lesser the risk. Again, it really helps to compare your company’s A/R turnover ratio with the average industry in your region.
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Accounts Receivable Collection Period
If you want more facts about your company’s A/R, convert the receivables turnover to collection period. Collection period is the average number of days it takes the company to collect its receivables.
Collection period = 365 ÷ (A/R turnover)
For Acme Company 2017:
Collection period = 365 ÷ 5.6 = 65.18
Collection period = 65 days
This means that it takes the company an average of 65 days to collect its invoices. The efficiency of this number is quite closely related to your industry’s standard on this respect and naturally, the terms on which the company sells its products or services. For example, if your Company allows customers 60 days to pay invoices, 65 days sales outstanding and 5.6 turns a year is fine. On the other hand, if the terms are the standard 30 days, then your finance team is not collecting its receivables quickly enough. This tells you that although your finance people might be excellent technicians, they lack some of the soft skills to get the turnover where it should be.
SUGGESTED TRAINING IN THIS CASE: Negotiation Skills, Influencing, Time Management, Leadership, Communications Skills, Handling Difficult Conversations, Eliminating Organizational Bureaucracy.
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Assessing Your Marketing & Sales Performance - Inventory Turnover
Quite similar to A/R turnover, your company aims at selling its inventory as quickly as possible, in the same way they aim at collecting receivables as quickly as possible. The faster your inventory turns over, the more cash it expects to collect to pay for salaries etc. This is how you analyze the inventory turnover:
Inventory turnover = Sales ÷ Average inventories (1st period + 2nd period)
As previously stated, you find your company’s sales figures on the income statement. Inventories are found on the balance sheet.
We said your company’s sales were $22,000,000
Inventory at beginning of period: $5,400,000
Inventory at end of the period: $6,000,000
($5,400,000 + $6,000,000) ÷ 2
Average inventory: $5,700,000
You got the average inventory by adding the inventory at the beginning of the period (from the first balance sheet) to the inventory at the end of the period (from the second period) and divide the sum by two which gives you $5,700,000.
Inventory turnover = $22,000,000 ÷ $5,700,000
Inventory turnover = 3.9 times
Remember, you want fast inventory turnover, because the slow turnover here tells you that your sales are weak. As we have been saying, this must be put into context by comparing your company’s inventory turns against industry standards.
SUGGESTED TRAINING IN THIS CASE: Sales training, Personal Productivity, Motivational Lectures, Leadership, Influencing.
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Assessing Your Operations Team - Gross Margin
Gross profit margins can be used to measure company efficiency and the effectiveness of the company’s production management. It is a measure of the efficiency of a company using its raw materials and labor during the production process. The higher the profit margin, the more efficient a company is. This is how you analyze the gross margin:
Gross margin = Gross income ÷ Sales
You’ll find both, the gross income and sales numbers on the income statement.
For example, Acme Company in 2017:
Gross margin = $5,600,000 ÷ $22,000,000 = 0.25
Gross margin = 25.5
25.5 Gross margin is normally considered very good in most businesses, any lower than that, would not be considered to be good, but please validate this with numbers coming from your industry.
SUGGESTED TRAINING IN THIS CASE: Negotiation Skills, Influencing, Time Management, leadership, Eliminating Organizational Bureaucracy.
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Assessing Your Supporting Functions - Operating Margin
Different to the gross margin, the operating margin tells you about management’s effectiveness in the back office. It measures the performance (or lack) of the non-revenue teams.
When a company has good gross margin but poor operating margin, then its management is somehow mishandling the back office and its expenses. Classic culprits are high sales costs, expensive offices, luxury cars, high T&E, excessive administrative staff. This is how you analyze the operating margin:
Operating margin = Operating income ÷ Sales (Operating income and sales are on the income statement).
For Acme Company in 2017:
Operating margin = $2,200,000 ÷ $22,000,000 = 0.10
Operating margin = 10%
You look for high operating margin. 10 – 16% operating margin is across industries considered very good, lower than 10% is totally not. A quick industry check on this area will give you context and a comparison point to show to your Executives.
SUGGESTED TRAINING: Negotiation Skills, Marketing 101, Influencing, Time Management, Leadership, Financial Accounting.
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Assessing Your Worker’s Productivity
This is how you analyze your worker productivity:
Worker productivity = Output in units or Dollars ÷ Worker hours
So, if a staff of 15 production workers produces 9,000 gadgets a week and work week is 40 hours:
Worker productivity = 9,000 ÷ 600 (15x40) = 15
Worker productivity = 15 gadgets per hour.
It doesn’t matter how you measure productivity, what matters is that you measure it. This can be challenging though, but even an imperfect measure of productivity will enable you to improve it through training as long as you apply it consistently. Again, this has to be measured against industry standard.
SUGGESTED TRAINING IN THIS CASE: Personal Productivity, Leadership, Motivation, Strategic Planning, Eliminating Organizational Bureaucracy.
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Assessing Your Leadership - Employee Turnover
Employee turnover Indicates how good your mid-management is. This is how you analyze the employee turnover:
Add the number of employees at the beginning of the period to the number at the end. Divide by two to find the average number of employees, then divide the number of employees separated during the period by the average number of employees to find the employee turnover rate.
This turnover rate can be of great help and you can use it in many different ways. One is to find out what areas you are losing the most people, you can check to previous years’ number to assess if your management is the culprit.
Some organizations use high employee turnover to control labor costs by permanently replacing experienced labor with less experienced and therefore cheaper labor. These companies do not invest in training. Investing in training saves you recruitment and onboarding fees and countless frustration and man hours.
SUGGESTED TRAINING: Personal Productivity, Leadership, Motivation, Strategic Planning, Eliminating Organizational Bureaucracy.
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Summary
You can take a very businesslike approach to training needs. You will have to if you are dealing with Senior Executives, never talk to them basing your findings on opinion and emotion. They run for the hills upon hearing comments such as: “I think…” “I am of the idea of…” “I believe that…” “In my opinion…” etc. If you pay attention to the way they speak, you will realize they never use these words themselves. Many L&D and HR colleagues use course feedback survey as a way of measuring training success, but by now, you know that although those results and comments are one data point, they are mainly formed by opinion. You still need to measure the factual impact on the business and its income statement if you wish so sign your own praises in front of the board.
Always,
Gustavo Bilbao
Photo by Stefan Stefancik