HRM-SI-02 FINANCIAL AND MARKETING

MANAGEMENT
CONTENT TABLE
Unit I:Marketing Management 02
BLOCK 1-Nature and scope of marketing ...................................... 02
BLOCK 2-Marketing Mix: Traditional 4 P’s and Extended 3 P’s for
services ............................................................................................04
BLOCK 3-Consumer Behaviour: Models and 5 steps buyer’s decision
process ........................................................................................... 06
BLOCK 4-Sales and distribution management ............................... 08

Unit II: Financial Management 11

BLOCK 1- Concepts, relevance, scope and 7 A’s of financial
management ................................................................................... 11
BLOCK 2- Principles of Accountancy: GAAP, Conventions and
Postulates ......................................................................................... 14
BLOCK 3-Ratio Analysis, Cash Flow and Fund Flow Analysis ........... 17
BLOCK 4- Tax implications relating to emoluments: allowances,
perquisites, fringe benefits ...............................................................17

Unit III: HR Accounting 22

BLOCK 1- Concept, Objectives and Information for HR
Accounting ....................................................................................... 22
BLOCK 2-HR Costs: Concept and method of measurement............ 24
BLOCK 3- HR valuation: Concept and determination of value,
monetary measurement of HR value............................................... 29
BLOCK 4- HR Audit: Concept, Auditing Process, essential steps in
HRA ....................................................................................... 33
 Unit I: Marketing Management
BLOCK-1 Nature and scope of marketing
 Nature of Marketing Management
The nature of marketing management involves the planning, organizing, directing, and
controlling of marketing activities of an organization to achieve specific objectives. In
general, marketing management is concerned with understanding and satisfying the
needs and wants of customers through the creation, promotion, and delivery of
products and services.
The key factors that define the nature of marketing management include:

1. Customer orientation: Marketing management focuses on understanding

customer needs, preferences, and behaviour in order to design products or services that
meet their needs. It involves conducting market research, analysing customer data, and
creating products or services that cater to customer demands.

2. Strategic planning: Marketing management involves formulating marketing

strategies that align with the overall business objectives. It requires the development of
a marketing mix that includes product design, price, promotion, and distribution
strategies.

3. Implementation and Control: Marketing management ensures that marketing

strategies are effectively implemented and monitored. It requires measuring and
evaluating the performance of marketing campaigns and making necessary adjustments
to improve effectiveness.

4. Relationship Management: Marketing management recognizes the importance

of building and maintaining long-term relationships with customers, channel partners,
and other stakeholders. It involves creating and managing customer networks, building
brand equity, and ensuring customer satisfaction.

5. Market Orientation: Marketing management is driven by a market-oriented

approach, meaning that it focuses on delivering superior customer value by
understanding the customer's needs to maintain a competitive advantage.
In summary, the nature of marketing management is centred on understanding the
needs and wants of customers, developing strategies to meet those needs, effectively
implementing those strategies, closely monitoring and evaluating performance, building
lasting relationships with customers, partners, and stakeholders, and maintaining a
market-oriented approach.
 Scope of Marketing Management
The scope of marketing management encompasses a wide range of activities and
responsibilities that relate to the planning, organizing, implementing, and controlling of
marketing activities to achieve the organization’s objectives. The scope of marketing
management activities can be categorized into the following:

1. Product and service management: This involves identifying customer needs and
developing products or services that meet those needs. It includes product
development, branding, packaging, product life cycle management, and product pricing.

2. Distribution management: This entails the identification of the most effective

ways of delivering products or services to customers. It includes developing and
managing a distribution network, supply chain management, and logistics management.

3. Promotion management: This involves the development and execution of

advertising, personal selling, public relations, and sales promotion strategies to create
awareness and persuade customers to buy products or services.
4. Pricing management: This involves developing and managing price strategies that
enable an organization to achieve its objectives. It includes identifying pricing objectives,
cost analysis, and developing pricing strategies that are responsive to customer needs
and competition.

5. Market research and analysis: This entails the collection, analysis, and
interpretation of data to gain insights into customer needs, competition, and market
trends.

6. Customer relationship management (CRM): This involves building strong

relationships with customers to create value. It includes managing customer complaints,
feedback, and retention strategies.

7. International marketing management: This entails understanding and

addressing the unique challenges of doing business in different countries and cultures.

8. Promotion and Communication: Marketing management involves developing

promotional strategies and communication plans to raise awareness, generate interest,
and stimulate demand for products or services. This includes advertising, sales
promotion, public relations, direct marketing, and digital marketing tactics to reach and
engage target audiences.

9. Ethical and Social Responsibility: Marketing management encompasses ethical

and socially responsible practices that prioritize honesty, integrity, and fairness in
dealings with customers, stakeholders, and society at large. This includes adhering to
 legal and regulatory requirements, avoiding deceptive or unethical marketing practices,
and actively contributing to the well-being of communities and the environment.

10. Promotion and Communication: Marketing management involves developing

promotional strategies and communication plans to raise awareness, generate interest,
and stimulate demand for products or services. This includes advertising, sales
promotion, public relations, direct marketing, and digital marketing tactics to reach and
engage target audiences.

11. Reach and customer accessibility: Product and Service Management:

Marketing management includes managing the entire product or service lifecycle, from
development and launch to growth and maturity. This involves identifying customer
needs, designing products or services, determining features and specifications, and
managing branding, packaging, and positioning strategies.

In conclusion, the scope of marketing management is broad and encompasses various

activities that are required to identify and meet customer needs, create value, and
achieve organizational objectives. A successful marketing manager must be
knowledgeable in all these areas and have the skills and capabilities to manage and
integrate them effectively.

Block-2 Marketing Mix: Traditional 4 P’s and

Extended 3 P’s for services
 Marketing mix
Marketing mix is a strategic tool used by marketing professionals to develop and
implement an effective marketing plan. It refers to the mix of controllable variables or
factors that a company can influence in order to satisfy a target market.
 Traditional 4 P’s
Marketing Mix, also known as the four P’s of Marketing, is a set of tactical tools that an
organization uses to promote its products or services to its target market. The four P’s
of marketing are:

1. Product: A product is anything that can be offered to a target audience to fulfill their
needs or wants. This includes physical products, services, information, and ideas.
Product decisions involve identifying the features and benefits of the product,
packaging, branding, and product positioning.

2. Price: This refers to the amount that a customer pays for a product or service. Pricing
decisions involve determining the cost of production, competition, market demand, and
various pricing strategies like penetration pricing, skimming pricing, and cost-plus
pricing.
 3. Place: Place or distribution includes all activities involved in making the product
available to the target audience. It includes selecting channels of distribution, logistics,
and inventory management. Factors considered in distribution decisions include market
coverage, transportation, product storage, and the most appropriate channel for
reaching the target audience.

4. Promotion: This includes all activities and methods used to increase product
visibility and create demand in the target market. Promotion decisions involve
advertising, personal selling, sales promotion, direct marketing, and public relations. The
objective of promotion is to create brand awareness, generate interest, and ultimately
persuade the target audience to purchase the product or service.

 Extension of 3 p’s for services

In addition to the 4 P’s of marketing, the extended 3 P’s of marketing for services are
often considered to address the unique qualities of service marketing. These three P's
are people, process, and physical evidence.

1. People: Services are intangible, and the people who deliver and receive the service
are critical to its quality and effectiveness. The people aspect of services marketing
refers to the employees, customers, and other stakeholders who are involved in
delivering and receiving the service.
It is essential to ensure that the employees offering the service have the required skills
and training to provide quality service to customers. Companies need to employ
relevant people to meet customer expectations, groom them to understand the deeper
inner workings of the company, and empower them to put this knowledge into action

2. Process: The process refers to the systems, procedures, and methods used to deliver
the service to the customers. The process aspect of services marketing focuses on
making sure that service delivery is efficient, effective, and consistent. The process must
meet the customer's needs and expectations and offer value to the organization.

3. Physical Evidence: Physical evidence refers to the tangible elements that the
customer can observe when they encounter the service. This physical evidence includes
factors such as the appearance of the service providers or products, the environment
and decor of the location, tools, and equipment used for the service delivery.
Physical evidence plays an essential role in service marketing as it creates an impression
in the customer's mind when they experience the service, which becomes a part of the
brand image. Physical evidence should reinforce the message of quality and the value of
the service/product, which goes a long way towards building trust and loyalty for the
service amongst the customers.
 In conclusion, the extended 3Ps are essential considerations that complement the
traditional 4Ps of the marketing mix while marketing services. Paying attention to these
elements will help companies create a successful services marketing strategy.

BLOCK-3 Consumer Behaviour: Models and 5

steps buyer’s Decision Process
 Consumer Behaviour
Consumer behaviour refers to the actions, reactions, and decisions that a person or
organization takes when selecting, purchasing, using, and disposing of products or
services to satisfy their needs and wants. It involves the process by which individuals
and groups search for, evaluate, purchase, use, and dispose of products and services to
satisfy their needs or wants.
Consumer behaviour takes into account the various factors and influences that impact
people's purchasing decisions, including psychological, social, and cultural factors. These
factors help to explain why people select certain products or services over others and
how they form brand preferences and loyalties.
Understanding consumer behaviour is crucial for marketers as it helps them to design
effective marketing strategies that appeal to their target market and influence their
purchasing decisions. By studying consumer behaviour patterns, marketers can also
identify opportunities for growth and innovation, enhance customer satisfaction, and
improve their bottom line.

 Models of Consumer Behaviour

There are several models of consumer behaviour to explain how and why consumers
make purchasing decisions. Here are four of the most common models of consumer
behaviour:

1. Economic model: The economic model assumes that people make rational
decisions based on their financial self-interest. Consumers evaluate the benefits and
costs of different options given their budgets and select the option with the highest
perceived value.

2. Learning/Behavioural model: This model focuses on how people learn to

behave. It assumes that consumers develop habits through experience and use past
experiences to make future decisions. Learning can occur through trial and error,
classical conditioning, or operant conditioning.

3. Psychodynamic model: The psychodynamic model assumes that consumer

behaviour is largely determined by unconscious motivations and emotions. These
motivations and emotions include cultural and social forces in shaping consumer
 behaviour. This model suggests that psychological factors and cultural symbolism
explain consumer preferences and buying behaviour.

4. Social model: The social model emphasizes how social groups and culture impact
consumer behaviour. Consumer behaviour is influenced by factors such as peer
pressure, social media, and word-of-mouth marketing. Social identity theory and social
comparison theories explain how social influences shape consumer behaviour.

These models help marketers in understanding and predicting consumer behaviour,

enabling them to develop effective marketing strategies that can appeal to their target
audience and influence their purchasing decisions. It is therefore important to look at
multiple models when analysing and predicting consumer behaviour.

 5 steps buyer’s decision process

The five steps that make up the buyer's decision process are as follows:

1. Problem/Need recognition: The buyer recognizes a problem or need that they

need to solve. This can be triggered by internal factors such as a desire for something
new or external factors like a product running out or a change in life circumstances.

2. Information Search: Once the problem has been identified, the buyer conducts
research and searches for information about potential solutions. This can involve
seeking information from various sources such as online reviews, friends/family
recommendations, advertising, and product catalogs.

3. Evaluation of Alternatives: After gathering information, the buyer evaluates the

available options to determine which option is best suited to their needs. This can
include comparing features, benefits, and prices across multiple options.

4. Purchase decision: Once the buyer has evaluated the alternatives, they make a
purchase decision. This can involve actually making the purchase in-store or online, or
placing an order for a product or service through a supplier.

5. Post-purchase evaluation: After making the purchase, the buyer evaluates

whether the product or service met their expectations. This evaluation can influence
future buying decisions, as well as the buyer's possible repeat business or referrals.

Marketers can use knowledge of the buyer's decision process to understand the
customer and develop marketing strategies that target each step, help influence the
decision-making process, and more effectively provide information that can help the
buyer feel more confident in their ultimate purchase decision.
 BLOCK-4 Sales and Distribution Management
 Sales Management
Sales management refers to the process of planning, implementing, and controlling the
sales activities of a company. The goal of sales management is to increase sales revenue
and profitability by ensuring that sales teams are performing at their best and meeting
their targets.

Some of the key activities involved in sales management include:

1. Sales planning: Sales planning involves setting sales goals and designing strategies
to achieve them. This may include creating a sales budget, identifying target customers,
and developing a sales plan that incorporates various sales techniques and tactics.

2. Sales team management: Sales team management involves recruiting, training,

and managing the sales team to ensure they are motivated and performing well. This
includes setting performance targets, tracking progress, providing feedback and
support, and implementing incentive programs to drive performance.

3. Sales forecasting and analysis: Sales forecasting and analysis involves using
consumer data, market trends, and previous sales data to predict future sales numbers.
This helps to allocate resources accordingly, adjust sales strategies, and make informed
decisions on pricing and product positioning.

4. Customer relationship management: Customer relationship management

involves building strong relationships with customers through effective communication,
follow-up, and customer support. This includes identifying customer needs and
preferences, addressing complaints and concerns, and developing targeted marketing
campaigns to improve customer acquisition and retention.

5. Sales performance reporting: Sales performance reporting involves creating

reports that detail sales results, identify trends, and highlight areas for improvement.
This allows sales managers to monitor progress, forecast future performance, and make
informed decisions on sales strategies.

Effective sales management requires a strong understanding of customer needs and

market trends, as well as the ability to motivate and manage sales teams to maximize
performance. By implementing effective sales management strategies, companies can
increase sales revenue and profitability, improve customer loyalty, and gain a
competitive advantage in their industry.
 Core Responsibilities:
 Lead and Develop Sales
Teams: Recruiting, onboarding, training, coaching, motivating, and evaluating
salespeople.
 Set Sales Goals and Objectives: Establishing clear, measurable, and achievable
targets for individual sales reps and the overall team. 
 Develop and Implement Sales Strategies: Defining the approach to reach target
customers, convert leads, and close deals.
 Manage the Sales Process: Designing and optimizing the steps involved in moving
prospects through the sales funnel.
 Forecast Sales: Predicting future sales performance based on data and market
analysis.
 Manage Sales Resources: Effectively allocating budget, technology, and other
resources to the sales team.
 Analyse Sales Performance: Tracking metrics, identifying areas for
improvement, and taking corrective actions.
 Build and Maintain Customer Relationships: Fostering positive relationships
with clients to secure repeat business and referrals.

 Distribution Management
Distribution management refers to the process of managing and overseeing the efficient
movement of goods and services from production to the point of consumption or end
customers. It involves managing and coordinating activities such as transportation,
warehousing, inventory management, order processing and fulfilment, and managing
relationships with suppliers, distributors, and customers.

Distribution management is crucial for businesses because it ensures efficient flow of

goods and services to reach the end customer in a timely and cost-effective manner.
Effective distribution management can help businesses to reduce transportation and
inventory costs, minimize delivery lead times, improve customer satisfaction, and gain
competitive advantage.

Distribution management is the coordinated process of ensuring that products and

services are delivered efficiently and effectively to customers. It involves managing the
flow of goods and services from production to distribution channels, including
wholesalers, retailers, and online retailers, to ensure they reach the end customer in a
timely and cost-effective manner.
Some of the key activities involved in distribution management
include:

1. Supply chain management: Supply chain management involves managing the flow of
goods and services from the point of production to the point of consumption. This
includes managing the logistics of transportation, inventory, and storage to ensure
products are delivered on time and in good condition.

2. Inventory management: Inventory management involves managing the level of

inventory held at each stage of the supply chain. This includes forecasting demand,
managing stock levels, and implementing strategies to minimize excess and obsolete
inventory.

3. Channel management: Channel management involves managing the channels of

distribution, such as wholesalers, retailers, and online marketplaces. This includes
identifying the most effective channels for reaching the target customer, managing
relationships with channel partners, and monitoring performance to optimize the
distribution network.

4. Order fulfilment: Order fulfilment involves managing the process of receiving,

processing, and delivering customer orders. This includes managing order volumes,
processing orders quickly and accurately, and tracking shipments to ensure on-time
delivery.

5. Customer service management: Customer service management involves

managing customer inquiries, complaints, and returns. This includes providing timely
and effective support, identifying opportunities for improvement, and developing
strategies to build customer loyalty.
Effective distribution management requires effective coordination and collaboration
with suppliers, partners, and customers. By optimizing distribution processes and
implementing innovative strategies, businesses can improve customer satisfaction,
meet demand, and gain a competitive advantage in their industry.
 Unit II: Financial Management
BLOCK-1 Concepts, relevance, scope and 7
A’s of financial management
 Concept of Financial Management
Financial management is the process of planning, organizing, directing, and controlling
an organization's financial resources. It involves managing an organization's financial
resources to ensure that it achieves its goals and objectives. The primary objective of
financial management is to maximize shareholder value by ensuring that the
organization's financial resources are used efficiently and effectively.

The concept of financial management involves various activities, including financial

planning, budgeting, accounting and financial reporting, financial analysis, and investing.
Financial planning involves forecasting future financial needs and developing a budget
to meet those needs. Budgeting helps the organization monitor and control its financial
performance by comparing actual results to planned results.

Accounting and financial reporting involve recording and reporting financial

transactions, ensuring that financial statements are accurate and reliable. Financial
analysis involves analysing financial data to make informed decisions about financial
investments and risk management.
Investing involves making decisions about how to allocate financial resources to achieve
the organization's goals. It includes managing financial risks, such as interest rate risk
and currency risk, and ensuring compliance with financial regulations.

Overall, the concept of financial management is essential for the success of any
organization, as it helps ensure that financial resources are used effectively and
efficiently to achieve the organization's goals. Effective financial management can help
an organization achieve growth, profitability, and sustainability, while poor financial
management can result in financial instability, insolvency, and ultimately, failure.

The key concepts of financial management include:

1. Financial Planning: This involves setting financial goals and developing strategies
to achieve those goals. Financial planning takes into account various factors such as cash
flow, revenue and expenses, capital investments, and funding sources.

2. Budgeting: This refers to the process of allocating funds to different areas of the
organization in accordance with the financial plan. Budgeting helps organizations to
prioritize their spending and make informed decisions about where to invest their
financial resources.
 3. Financial Analysis: This involves evaluating the financial performance of an
organization by analysing financial statements, such as the balance sheet, income
statement, and cash flow statement. Financial analysis helps organizations to identify
areas of strength and weakness within their financial operations and make informed
decisions about future investments.

4. Risk Management: This involves identifying potential financial risks and

developing strategies to mitigate those risks. Risk management helps organizations to
protect their financial resources and minimize the impact of financial shocks, such as
economic recessions, market instability, and unexpected expenses.

5. Performance Measurement: This involves monitoring and evaluating the

financial performance of an organization over time in order to identify areas for
improvement. Performance measurement helps organizations to track their progress
towards financial goals and make informed decisions about resource allocation.
Overall, financial management is a critical function within organizations as it ensures the
efficient and effective use of financial resources to achieve organizational objectives
while minimizing financial risks and maximizing financial performance.

 Relevance of financial management

Financial management is highly relevant in both the business and non-business sectors.
Here are some of the key reasons why:

1. Efficient allocation of resources: Financial management helps to ensure that

financial resources are allocated in the most optimal way. This means that limited
resources are effectively utilized towards the achievement of organizational goals. This
ensures maximum return on investment and profitability for businesses, and ensures
the achievement of social and public objectives in non-business sectors.

2. Risk management: Financial management helps organizations to identify financial

risks and develop strategies to mitigate those risks. By assessing different types of risks
and managing them effectively, be it operational risk, credit risk, reputational risk, etc.
organizations can avoid loss and uncertainty associated with such financial risks.

3. Sound financial decision-making: Financial management provides the necessary

information and tools for making sound financial decisions. By evaluating different
financial options and identifying the most suitable option for the organization, financial
decision-makers can make informed decisions that will support the organizational goals
and lead to greater success.

4. Improved financial performance: Effective financial management will help

optimize organizations' financial systems and processes to improve the organization's
 overall financial performance. This, in turn, contributes to increased profitability,
improved return on investment and leads to more success for businesses. Non-business
organizations, on the other hand, can achieve more social objectives while lowering
costs.

5. Business scalability: Good financial management helps to find out the appropriate
funding strategies that can enable the business to expand to new markets, develop new
products and services and grow within sustainable limits.

Overall, financial management is essential for the successful operations of any

organization - be it a business or non-business - by helping them operate efficiently and
achieve the objectives. Therefore, it is important to ensure effective financial
management practices.

 7A’s of financial management

The "7A" of financial management are:
1. Acquire funds: The first step in financial management is acquiring funds, which can
be generated through several sources such as investments, loans, and other sources of
financing.

2. Allocate funds: Once the funds have been acquired, they need to be allocated to
different parts of the organization according to priority and need. The allocation of funds
can be done through budgeting, financial planning, and other asset management
techniques.

3. Analyse data: Analysing financial data is an essential component of financial

management. This allows financial managers to understand the cash flow, profitability,
and financial health of the organization.

4. Apply policies: The financial policies and procedures of the organization provide a
framework for the financial decision-making processes. Financial managers must be
well-versed in the policies and procedures of their organization and apply them
consistently and effectively.

5. Assess performance: Financial management involves monitoring and evaluating

the financial performance of the organization. This helps financial managers to identify
areas of strength and weakness, to understand the root causes of financial problems
and to take corrective measures where necessary.

6. Anticipate problems: Identifying potential financial problems is an important

aspect of financial management. By anticipating potential financial issues, financial
 managers can take proactive steps to address them before they have a significant impact
on the organization.
7. Adjust plans: Financial management involves constantly adjusting financial plans
and strategies in response to changes in the business environment, such as fluctuations
in the market, changes in customer behaviour, or industry developments. Financial
managers must be agile and flexible to adjust financial plans quickly in response to
changes in the organization's circumstances.

Overall, the 7A of financial management provide a comprehensive framework for

financial decision-making processes, highlighting the importance of financial data
analysis, performance evaluation, proactive planning, and adapting to ongoing changes.
Financial managers who effectively implement the 7A framework can help organizations
achieve sustainable financial growth and success.

BLOCK-2 Principles of Accountancy: GAAP,

Conventions and Postulates
 Principles of Accountancy
The Principles of Accountancy are the fundamental concepts, guidelines, and rules that
guide the preparation and reporting of financial statements and other accounting
transactions. These principles are essential for maintaining the accuracy, transparency,
and consistency of financial records and reports.
There are several principles of accountancy, including:

1. The principle of objectivity: This requires financial statements to be based on

objective evidence that can be verified independently.

2. The principle of consistency: This requires that accounting principles and

methods remain consistent from one period to another, to ensure that financial
statements can be compared over time.

3. The principle of relevance: This requires financial statements to report

information that is relevant to the user's needs, including past, present, and future
events.

4. The principle of materiality: This requires that financial statements disclose all
information that may impact the user's decision-making, including transactions that are
significant in size or nature.

5. The principle of conservatism: This requires financial statements to report losses

and expenses as soon as they are recognized, but to defer gains and revenue until they
are realized.
 6. The principle of completeness: This requires that financial statements include
all information that is necessary for a user to make informed decisions.

7. The principle of going concern: This assumes that the organization will continue
to operate indefinitely and prepares financial statements accordingly.

8. The principle of matching: This requires that expenses are matched with the
revenue that they help to generate in the same accounting period.

9. The principle of cost: This requires that assets are recorded at their cost price.
Overall, the principles of accountancy provide a foundation for financial reporting that
is accurate, transparent, and relevant to the organization's stakeholders.

 GAAP
GAAP (Generally Accepted Accounting Principles) is a set of accounting standards,
rules, and guidelines that are used to prepare and present financial statements for
businesses and organizations in the United States. These principles help to ensure that
financial statements are comprehensive, accurate, and consistent across organizations.
The GAAP guidelines cover a wide range of accounting principles, including revenue
recognition, asset valuation, financial statement presentation, and disclosure
requirements. By following GAAP guidelines, businesses and organizations can provide
transparent and reliable financial information to investors and other stakeholders.
GAAP standards cover a wide range of accounting topics that are important for
businesses and organizations to follow when preparing financial statements. Some of
the key topics covered by GAAP standards include:

1. Revenue recognition: GAAP standards provide guidance on how to recognize

revenue from sales of goods and services.

2. Asset valuation: GAAP standards dictate how assets should be valued, including
how to depreciate fixed assets like buildings and machinery.

3. Financial statement presentation: GAAP standards provide guidance on how

financial statements should be presented, including the format and content of financial
statements.

4. Disclosure requirements: GAAP standards require businesses and organizations

to disclose certain information in their financial statements, such as significant
accounting policies and risks.
 5. Liability recognition: GAAP standards provide guidance on how to recognize and
account for liabilities, such as loans, accounts payable, and other financial obligations.

6. Inventory methods: GAAP standards provide guidance on how to value and

account for inventory, including the use of the first-in, first-out (FIFO) and last-in, first-
out (LIFO) inventory methods.

Overall, GAAP standards are designed to promote consistency and reliability in financial
reporting, ensuring that financial statements are prepared and presented in a
transparent, accurate, and consistent manner.

 Conventions and Postulates

The conventions of financial management refer to the generally accepted principles and
practices in the field of financial management. These conventions help ensure
consistency and accuracy in financial reporting and decision-making. Here are some of
the most common conventions of financial management:

1. Consistency: This convention requires that financial information be reported in a

consistent manner over time. This ensures that financial statements can be compared
year over year and that trends can be identified.

2. Conservatism: This convention suggests that financial managers should be

conservative when making estimates and assumptions. For example, they should err on
the side of caution when estimating revenues and should be pessimistic when
estimating expenses.

3. Materiality: This convention requires that only significant financial information be

reported in financial statements. This means that small transactions or events may be
excluded if they are not material to the overall financial picture.

4. Disclosure: This convention requires that all relevant financial information be

disclosed in the financial statements. This includes information about significant
accounting policies, contingent liabilities, and other relevant information.

5. Cost-Benefit Analysis: This convention requires that financial managers consider

the costs and benefits when making financial decisions. This ensures that financial
resources are used efficiently and effectively.

By following these conventions of financial management, companies can ensure that

their financial information is accurate, reliable, and relevant. This helps investors,
creditors, and other stakeholders make informed decisions about the company's
financial health and performance.
 Postulates
In financial management, there are several postulates or assumptions that are used as
the basis for financial decision-making. Some of the key postulates of financial
management include:

1. Time Value of Money: This postulate suggests that money today is worth more
than the same amount of money in the future. This is because money today can be
invested and earn interest or returns, which increases its value over time.

2. Risk-Return Trade-off: This postulate suggests that there is a trade-off between

risk and return in financial decision-making. Higher returns are typically associated with
higher risks, so financial managers must balance the desire for higher returns with the
need to manage risk.

3. Profit Maximization: This postulate suggests that the primary goal of financial
management is to maximize profits. This postulate assumes that companies operate in
a competitive market and that profits are a good measure of a company's success.

4. Law of Conservation of Wealth: This postulate suggests that wealth cannot be

created or destroyed, only transferred. Therefore, financial managers must focus on
creating value for shareholders rather than simply transferring wealth from one party
to another.

5. Principle of Diversification: This postulate suggests that risk can be reduced by

spreading investments across different assets or securities. By diversifying their
portfolio, investors can reduce their exposure to any one asset or security.
Overall, these postulates provide a framework for financial decision-making and help
guide financial managers in making informed decisions that maximize shareholder value
and manage risk.

BLOCK-3 Ratio Analysis, Cash Flow and Fund

Flow Analysis
 Ratio Analysis
Ratio analysis is a method of examining a company's balance sheet and income statement to
learn about its liquidity, operational efficiency, and profitability. It doesn't involve one single
metric; instead, it is a way of analyzing a variety of financial data about a company. Ratio
analysis is a cornerstone of fundamental equity analysis.

There are many different ratios that investors and other business experts can analyze to make
predictions about a company's financial stability and potential future growth. These can be used
to evaluate either how a company's performance has changed over time or how it compares to
other businesses in its industry.
Key Takeaways

 Ratio analysis compares line-item data from a company's financial statements to evaluate it
profitability, liquidity, efficiency, and solvency.

 Ratio analysis can track how a company is performing over time or how it compares to
another business in the same industry or sector.

 Ratio analysis may also be required by external parties that set benchmarks often tied to risk,
such as lenders.

 While ratios offer useful insight into a company, they should be paired with other metrics to
obtain a broader picture of a company's financial health.

 Examples of ratio analysis include the current ratio, gross profit margin ratio, and inventory
turnover ratio.
 Ratio analysis is referred to as the study or analysis of the line items present in the financial
statements of the company. It can be used to check various factors of a business such as
profitability, liquidity, solvency and efficiency of the company or the business.

 Ratio analysis is mainly performed by external analysts as financial statements are the
primary source of information for external analysts.

 The analysts very much rely on the current and past financial statements in order to obtain
important data for analysing financial performance of the company. The data or information
thus obtained during the analysis is helpful in determining whether the financial position of a
company is improving or deteriorating.

 Categories of Ratio Analysis

 There are a lot of financial ratios which are used for ratio analysis, for the scope of Class 12
Accountancy students. The following groups of ratios are considered in this article, which are
as follows:

 1. Liquidity Ratios: Liquidity ratios are helpful in determining the ability of the company to
meet its debt obligations by using the current assets. At times of financial crisis, the company
can utilise the assets and sell them for obtaining cash, which can be used for paying off the
debts.

 Some of the most commonly used liquidity ratios are quick ratio, current ratio, cash ratio, etc.
The liquidity ratios are used mostly by creditors, suppliers and any kind of financial
institutions such as banks, money lending firms, etc for determining the capacity of the
company to pay off its obligations as and when they become due in the current accounting
period.
 2. Solvency Ratios: Solvency ratios are used for determining the viability of a company in
the long term or in other words, it is used to determine the long term viability of an
organisation.

 Solvency ratios calculate the debt levels of a company in relation to its assets, annual earnings
and equity. Some of the important solvency ratios that are used in accounting are debt ratio,
debt to capital ratio, interest coverage ratio, etc.

 Solvency ratios are used by government agencies, institutional investors, banks, etc to
determine the solvency of a company.

 3. Activity Ratio: Activity ratios are used to measure the efficiency of the business
activities. It determines how the business is using its available resources to generate
maximum possible revenue.

 These ratios are also known as efficiency ratios. These ratios hold special significance for
business in a way that whenever there is an improvement in these ratios, the company is able
to generate revenue and profits much efficiently.

 Some of the examples of activity or efficiency ratios are asset turnover ratio, inventory
turnover ratio, etc.

 4. Profitability ratios: The purpose of profitability ratios is to determine the ability of a

company to earn profits when compared to their expenses. A better profitability ratio shown
by a business as compared to its previous accounting period shows that business is
performing well.

 The profitability ratio can also be used to compare the financial performance of a similar firm,
i.e it can be used for analysing competitor performance.

 Some of the most used profitability ratios are return on capital employed, gross profit ratio,
net profit ratio, etc.

 Use of Ratio Analysis

 Ratio analysis is useful in the following ways:

 1. Comparing Financial Performance: One of the most important things about ratio analysis is
that it helps in comparing the financial performance of two companies.

 2. Trend Line: Companies tend to use the activity ratio in order to find any kind of trend in the
performance. Companies use data from financial statements that is collected from financial
statements over many accounting periods. The trend that is obtained can be used for
predicting the future financial performance.
 3. Operational Efficiency: Financial ratio analysis can also be used to determine the efficiency
of managing the asset and liabilities. It helps in understanding and determining whether the
resources of the business is over utilised or under utilised.

Advantages of Ratio Analysis are as follows:

 Helps in forecasting and planning by performing trend analysis.

 Helps in estimating budget for the firm by analysing previous trends.
 It helps in determining how efficiently a firm or an organisation is operating.
 It provides significant information to users of accounting information regarding the
performance of the business.
 It helps in comparison of two or more firms.
 It helps in determining both liquidity and long term solvency of the firm.

Disadvantages of Ratio Analysis are as follows:

 Financial statements seem to be complicated.

 Several organisations work in various enterprises each possessing different environmental
positions such as market structure, regulation, etc., Such factors are important that a
comparison of 2 organisations from varied industries might be ambiguous.
 Financial accounting data is influenced by views and hypotheses. Accounting criteria provide
different accounting methods, which reduces comparability and thus ratio analysis is less
helpful in such circumstances.
 Ratio analysis illustrates the associations between prior data while users are more concerned
about current and future data.

 Cash flow

Cash flow is the net amount of cash that moves in and out of your business during a given
period. This includes all money your company makes and spends.

Your company’s cash flow statement provides a detailed look at how your business’s cash has
moved during this period, which could be monthly, quarterly, or annually. Essentially, it shows
you where your money came from and where it went, offering an important assessment of
your business’s financial health. This assessment is important when budgeting and to show
investors.

Your company’s goal should be to generate a positive flow of cash, indicating that you can
cover future obligations and expenses because your liquid assets are increasing—in other
words, you’re successfully operating and making money.
 Of course, not every business will be immediately profitable. In fact, most startups take three
to four years to turn a profit. But as you grow and build your company, showing a positive
cash flow can help you attract investors if your business wants to expand into new markets,
upgrade systems to better reach current markets, and more.

The 3 main types of cash flow

Below, we break down each type of cash flow and give the formula for each source. We also
share some common items that fall under each type of cash flow.

If this seems intimidating, don’t worry. You can always hire a financial analyst to review your
company’s cash flow. Upwork can connect you with independent experts to help you
understand your company’s financial health.

But if you want to know more about tracking and measuring your own cash flow, you can
follow these jump links:

 Cash flow from operations

 Cash flow from investing
 Cash flow from financing

1-Cash flow from operations (CFO)

Your operating cash flow measures the cash generated or consumed by your company’s
standard operating activities—in other words, sales, bills, and wages. These business activities
can include generating revenue by providing services to your customers or producing and
selling goods, paying expenses, or funding working capital.
 The cash flow from operating activities is found in the first section of your cash flow
statement. This number is integral to your business’s financial health. It shows where and
how money is being spent and offers insight into your company’s operations and where you
make improvements. It also shows how much cash your company has available to finance
your business’s growth and new endeavors.

You can calculate your company’s operating income cash flow in two ways: the indirect
method and the direct method.

With the indirect method, you’ll add your business’s net income, your non-cash expenses,
and changes in your working capital using the following formula:

Operating Cash Flow = Net Income + Non-Cash Expenses + Changes in Working Capital

The direct method actually tracks all of your business’ cash transactions during a specific
period. It uses your company’s actual cash receipts to determine your operating cash flow.

Unlike accrual accounting, which recognizes earned revenue, the direct method instead
focuses on payments received from customers and money paid to suppliers. While it provides
greater detail about your operating cash flow, it tends to be more time-consuming and
difficult.

Have what it takes to help businesses calculate CFO using the direct method? Look no further
than Upwork. Our remote work platform can connect you to the best cash flow analyst
jobs available.

Items to include

The following items would fall under your business operations cash flow:

 Cash received from sales of goods: The money you make from products your company
manufactures and sells is considered a cash inflow and is a big part of your operational cash
flow.
 Purchase of day-to-day supplies: Money spent on daily supplies for your company to do
business is subtracted from any sales made as a cash outflow.
 Purchase of inventory: The cost of inventory purchased—either merchandise through a third
party that you resell or the supplies needed to manufacture your goods—is also subtracted
from your operational cash flow total as a cash outflow.
 Utility bills: The cost of utility bills is another type of cash outflow included in your operational
cash flow.
 Employees’ wages: Salaries and wages spent during a specific accounting period are also
considered cash outflow.

2-Cash flow from investing (CFI)

This section of your cash flow statement shows how much money your company has spent or
made through investment activities during specific accounting periods. These activities can
include purchasing assets—such as equipment, property, factories (which are, essentially,
fixed assets and long-term assets)—mergers with and acquisitions of other companies, and
investments in marketable securities like stocks and bonds.

The formula

To calculate your cash flow from investing activities, you’ll subtract the money your business
has spent on buying assets or on loans from the money your company has received from the
sale of assets and any amounts collected on loans.

Investing cash flow = Money received from the sale of assets and any amounts collected on
loans - the money spent to buy assets and/or loans

Items to include

While we’ve already talked a bit about some investing activities that might be included in this
section of your cash flow statement, let’s take a closer look at some of them:

 Purchase of investments in the market: If your company makes any investments in

marketable securities, such as stocks and bonds, it’s considered a cash outflow.
 Acquisition of a business: This includes any payments related to merging with or purchasing
another company.
 Loans: The collection of advanced loans or debt repayment is considered an investing activity
on your cash flow statement.
 Purchase of a fixed asset: Also called capital expenditures or cash equivalent, this cash
outflow includes the purchase of any property, plant, or equipment your company makes
(and the sale of these items would be a cash inflow).

These assets depreciate over time, reducing the amount of taxes you'll pay. For many
companies, positive cash flow from operations is used to offset the negative cash flow from
investing. And profitability comes as investments are paid down.

3-Cash flow from financing (CFF)

 The final section of your cash flow statement is the net amount of funding your company
generates over a specific period of time. Essentially, your cash flow from financing activities
boils down to how your company’s cash moves among its owners, investors, and creditors.
This section includes your business’s long-term debts, equity, and dividends.

The formula

To calculate your financing activities cash flow, use the following formula:

Cash flow from financing = Cash gained by equity – (Dividend payments + Repurchase of
equity)

Items to include

The three variables used to calculate your financing cash flow are:

 Cash gained by equity: This cash inflow from external lenders can refer to both short-term
and long-term borrowings. These lenders become partial owners in exchange for providing
financing.
 Dividend payments: This cash outflow pays dividends to everyone who has invested in your
company. These could be recurring or a one-time cash payment.
 Repurchase of equity: Another cash outflow, this refers to the repurchase of shares in your
company that were previously issued and traded. This reduces the number of shares in
circulation, thus reducing your company’s net dilution (i.e., the reduction of existing
stockholders’ ownership percentage in a company due to the issuance of additional stocks.

 Fund Flow Analysis

Definition

Fund Flow Analysis is a financial tool used to track the movement of funds within an
organization over a specific period. It focuses on identifying how funds are sourced (inflows) and
utilized (outflows), providing insights into changes in the company’s financial position between
two balance sheet dates. This analysis helps in understanding the company's liquidity, financial
health, and operational efficiency by examining the changes in assets, liabilities, and equity.

Key Objectives:

 Identify Sources and Uses: Determine where the company’s funds are coming from and how
they are being spent.

 Evaluate Financial Changes: Analyze changes in financial position and assess the impact on
liquidity and solvency.

 Understand Financial Strategies: Gain insights into the company's financial strategies and
decision-making processes.
Types of Fund Flow Analysis

1. Sources of Funds

Sources of funds refer to the origins of financial resources that contribute to an increase in the
company’s cash flow. Common sources include:

 Equity Financing: Funds raised by issuing new shares or other equity instruments.

 Debt Financing: Proceeds from long-term borrowings such as bonds or loans.

 Sale of Assets: Cash received from selling non-current assets like property, machinery, or
investments.

 Depreciation: Non-cash charges that contribute to cash flow by reducing taxable income and
preserving cash.

2. Uses of Funds

Uses of funds represent the allocation or expenditure of financial resources. Common uses
include:

 Capital Expenditures: Investments in long-term assets, such as purchasing new equipment or

expanding facilities.

 Repayment of Debt: Payments made to reduce outstanding borrowings or loans.

 Dividend Payments: Disbursements made to shareholders from profits.

 Increase in Working Capital: Additional funds required to support operational activities, such
as increasing inventory or receivables.

3. Change in Working Capital

Changes in working capital reflect the impact of operational activities on the company's liquidity.
Key components include:

 Current Assets: Changes in cash, receivables, and inventories.

 Current Liabilities: Changes in payables and other short-term obligations.

 Impact on Liquidity: Understanding how changes in working capital affect the company's
ability to meet short-term obligations.

Uses of Fund Flow Analysis

1. Financial Planning and Strategy

 Budgeting: Helps in forecasting future financial needs and planning capital expenditures.

 Investment Decisions: Evaluates the feasibility of new projects or expansion plans by

understanding the availability of funds.

 Debt Management: Assesses the company’s capacity to meet debt obligations and plan for
refinancing.

2. Performance Evaluation
  Efficiency: Measures how effectively the company uses its funds for growth and operations.

 Liquidity: Provides insights into the company’s ability to maintain adequate cash flow and
meet short-term obligations.

 Financial Stability: Assesses the balance between equity and debt financing and its impact on
overall stability.

3. Credit Analysis

 Creditworthiness: Evaluates the company’s ability to repay loans by analyzing cash flows and
fund sources.

 Risk Assessment: Helps lenders and investors understand the company’s financial health and
potential risks.

4. Internal Controls and Auditing

 Monitoring Transactions: Tracks sources and uses of funds to detect any anomalies or
inefficiencies.

 Ensuring Compliance: Verifies that financial practices align with company policies and
regulatory requirements.

5. Stakeholder Communication

 Transparency: Provides a clear picture of how funds are managed and allocated, enhancing
communication with investors, creditors, and other stakeholders.

 Decision-Making: Supports stakeholders in making informed decisions based on the

company’s financial movements and strategies.

Importance of fund flow statement

These are five reasons why a fund flow statement holds immense importance.

1. Liquidity assessment

Outlining the sources and uses of funds helps the statement provide insights into the organization’s
ability to meet short-term financial obligations and operational needs.

2. Capital utilization efficiency

This financial document offers a detailed breakdown of fund allocation across various activities,
including investments and working capital. The analysis is instrumental in optimizing resource
allocation and enhancing financial performance.

3. Trend analysis

The statement facilitates trend analysis by presenting a historical perspective of fund movement over
different periods. Stakeholders can identify patterns and trends to predict future financial activities.

4. Strategic decision support

As a comprehensive financial document, it provides management and investors with a clear
understanding of the economic drivers shaping the organization’s growth.

5. Financial performance evaluation

The analysis provided by the statement goes beyond traditional profit and loss considerations. It
offers a better understanding of the financial dynamics that impact an organization’s bottom line.

Uses of fund flow statement

Here are some significant uses and advantages of a fund flow statement.

1. Strategic planning

The statement offers valuable insights into the allocation of funds across different activities. The
information assists management in aligning financial strategies with organizational goals.

2. Investor decision-making

Investors rely on the statement to decide about a company’s financial stability and growth potential.
Understanding the movement of funds allows investors to check the organization’s ability to
generate returns and meet obligations.

3. Creditworthiness assessment

Scrutinizing the sources and uses of funds helps creditors gauge the company’s ability to meet its
financial obligations.

4. Risk management

The statement helps identify potential financial risks and mitigate strategies. It allows organizations
to navigate challenges and uncertainties better.

5. Budgetary planning

Organizations use the fund flow statement for budgetary and financial planning, as it offers a
granular account of expected cash outflows and inflows.

Conclusion

Fund Flow Analysis is a vital tool for understanding the financial dynamics of an organization. By
identifying sources and uses of funds, it provides a clear picture of how financial resources are
managed and allocated. Its applications range from financial planning and performance
evaluation to credit analysis and internal controls. Through practical examples, it is evident that
Fund Flow Analysis aids in making informed decisions, enhancing transparency, and ensuring
financial stability.

This detailed exploration covers the core aspects of Fund Flow Analysis, offering insights into its
definition, types, uses, and practical examples. By applying this analysis, companies and
stakeholders can better manage financial resources, plan for the future, and maintain a sound
financial position.
 to

benefits
Emoluments refer to the total salary or compensation received by an employee,
including all benefits, bonuses, and allowances. There are several tax implications
related to emoluments that employers and employees need to consider, including:

1. Income Tax: Emoluments are subject to income tax, which is a tax on the
employee’s income. Employers are required to deduct income tax from the
employee’s salary and remit it to the government.

2. Social Security Contributions: Employers and employees are also required to

make social security contributions, which are taxes that fund social security benefits
such as retirement, disability, and survivor benefits.

3. Fringe Benefits Tax: Some benefits and allowances provided to employees may be
subject to fringe benefits tax. For example, if an employer provides a company car for
the employee’s personal use, this may be subject to fringe benefits tax.

4. Withholding Tax: If an employee is a non-resident or is receiving income from

sources outside of their home country, they may be subject to withholding tax. This is a
tax on income that is withheld at the source, such as by the employer.
It is important for employers and employees to understand these tax implications
related to emoluments to ensure compliance with tax laws and regulations. Employers
should also provide employees with a clear breakdown of their emoluments and the
taxes deducted to ensure transparency and clarity.

 Allowance
An allowance is a sum of money given regularly to a person, typically a child, as a source
of income or to cover specific expenses. In the context of personal finance, an allowance
is often provided by parents or guardians to their children to help them learn financial
responsibility and budgeting skills. This allowance can be given on a weekly, bi-weekly,
or monthly basis, and can be used to cover expenses such as clothing, entertainment,
and school supplies.

An allowance can also refer to a specific type of payment or benefit provided to

employees by their employers. This type of allowance is typically used to cover specific
expenses related to the job, such as travel, meals, or housing. For example, an employer
may provide a travel allowance to cover the cost of transportation when an employee
is required to travel for work.
In some cases, an allowance may also refer to a sum of money given to an individual as
a form of financial assistance.

This type of allowance is often provided by the government or charitable organizations

to individuals who are facing financial hardship or difficult circumstances.
 Overall, an allowance is a form of financial support or payment that is provided on a
regular basis, either to individuals or employees, to cover specific expenses or provide a
source of income.

 Types of allowance
There are different types of allowances that are provided to individuals and employees.
Here are some examples:

1. Child Allowance: This is an allowance that is given to parents or guardians to help

them cover the expenses of raising a child. This type of allowance is typically provided
by the government and is intended to support families with children.

2. Travel Allowance: This type of allowance is provided to employees to cover the

cost of transportation when they are required to travel for work. It may include
allowances for airfare, hotel stays, meals, and other expenses incurred during the trip.

3. Housing Allowance: This is an allowance provided by an employer to cover the

cost of housing for an employee. This is typically provided to employees who are
required to relocate to a new city or country for work.

4. Meal Allowance: This type of allowance is provided to employees to cover the cost
of meals while they are on the job. It may include allowances for breakfast, lunch, and
dinner, or a per diem allowance for meals when the employee is traveling for work.

5. Clothing Allowance: This is an allowance provided to employees to cover the cost

of work-related clothing or uniforms. It may include allowances for special protective
gear, such as safety boots or hard hats.

6. Education Allowance: This type of allowance is provided to employees to cover

the cost of further education or training related to their job. It may include allowances
for tuition fees, textbooks, and other related expenses.
These are just a few examples of the different types of allowances that may be provided
to individuals and employees. The specific allowances provided may vary depending on
the country, industry, and employer.

 Perquisites
Perquisites, also known as “perks” or “fringe benefits,” are non-salary benefits or
expenses that an employee receives from their employer as part of their compensation
package. These benefits or expenses are in addition to the employee’s regular salary and
are intended to provide additional incentives to attract and retain employees.
Perquisites can take many forms and vary depending on the employer and industry.
Some common examples of perquisites include:
 2. Company car or car allowance: Some employers provide their employees
with a company car, while others offer a car allowance to cover the cost of a
personal vehicle used for work purposes.

2. Health insurance: Many employers offer health insurance coverage to their

employees as a perquisite.

3. Retirement benefits: Employers may offer a retirement plan to their employees,

such as a 401(k) plan, as a perquisite.

4. Stock options: Some companies offer their employees the option to purchase
company stock at a discounted price as a perquisite.

5. Education or training benefits: Some employers provide their employees with

educational or training benefits to help them improve their skills and knowledge.

6. Gym memberships or wellness programs: Some employers offer gym memberships

or wellness programs as a perquisite to help their employees stay healthy and fit.

7. Housing or relocation benefits: Employers may offer housing or relocation

benefits to employees who are required to relocate for work.

8. Travel or entertainment expenses: Some employers provide their employees

with travel or entertainment expenses as a perquisite, particularly for employees who
frequently travel for work.
Overall, perquisites can provide valuable benefits to employees beyond their regular
salary. However, it’s important to note that perquisites may have tax implications for
both the employer and employee, and employers should ensure that they comply with
local and national laws regarding perquisites.

 Fringe benefits
Fringe benefits are a type of non-wage compensation that employers may offer to their
employees in addition to their regular salary or wages. Fringe benefits can take many
forms and are intended to provide additional incentives and support to employees
beyond their regular wages.

Some common examples of fringe benefits include:

3. Health insurance or medical benefits: Employers may offer their employees

health insurance or medical benefits to help them cover the cost of medical
expenses.
2. Retirement benefits: Employers may offer a retirement plan, such as a 401(k) plan,
to help employees save for their future.

3. Disability insurance: Employers may provide disability insurance to employees who

are unable to work due to illness or injury.

4. Life insurance: Some employers offer life insurance coverage to employees as a

fringe benefit.

5. Flexible spending accounts: Employers may offer flexible spending accounts

(FSAs) to help employees pay for eligible medical expenses or dependent care expenses.

6. Paid time off: Employers may offer paid time off, such as vacation days or sick days,
to employees as a fringe benefit.

7. Education or training benefits: Some employers provide their employees with

educational or training benefits to help them improve their skills and knowledge.

8. Employee discounts or perks: Employers may offer their employees discounts

on products or services, such as gym memberships or travel discounts.
Overall, fringe benefits can provide valuable support and incentives to employees
beyond their regular wages or salary. The specific fringe benefits offered may vary
depending on the employer, industry, and location.
 Unit III: HR Accounting
BLOCK-1 Concept, Objectives and Information
for HR Accounting
 Concept of HR Accounting
Human Resource (HR) Accounting is a concept that involves measuring and reporting on
the costs and value of human resources in an organization. HR accounting provides a
way for organizations to evaluate the investment made in their employees and monitor
the returns on that investment. It focuses on the quantification of human resources by
measuring the cost of acquiring, developing, and maintaining the human resources of
an organization.
The concept of HR accounting includes several elements, such as:
4. Recruitment and Selection costs: This includes the cost of advertising,
interviewing, and selecting candidates.

5. Training and Development costs: This includes the cost of training programs,
development programs, mentoring, coaching, and other programs that enhance
employees’ skills.

6. Compensation and Benefits costs: This includes the cost of salaries, wages,
incentives, and other benefits that an organization provides to its employees.

4. Retention costs: This includes the cost of programs that aim to retain employees
in the organization, such as employee engagement programs, career development, and
work-life balance programs.

5. Employee Turnover costs: This includes the cost of losing employees, such as
replacement costs, retraining costs, and lost productivity.
HR accounting helps organizations to understand the costs and benefits associated with
their human resources, and to make informed decisions about how to allocate resources
to maximize returns. By quantifying the value of human resources, HR accounting can
also help organizations to improve their strategic planning and decision-making
processes.

 Objective for HR Accounting

The objectives of HR accounting can be summarized as follows:
1. To measure the cost of acquiring, developing, and maintaining the human resources
of an organization.
2. To measure the return on investment (ROI) from the human resources of an
organization.
 3. To provide information to managers for better human resource management
decisions.
4. To help in the formulation of strategic plans and policies.
5. To determine the effectiveness of human resource management practices.
6. To improve the allocation of resources towards human resources.
7. To enhance the accountability of HR professionals and the HR department.
8. To provide a basis for benchmarking and comparing HR practices across organizations.
9. To aid in budgeting and forecasting of HR costs.
10. To promote transparency and accountability in human resource management.

Overall, the objectives of HR accounting are to help organizations understand the value
of their human resources, identify areas for improvement, and make informed decisions
about how to allocate resources to maximize returns. HR accounting can play a crucial
role in the strategic planning and decision-making processes of an organization, and can
help to enhance the effectiveness and efficiency of human resource management
practices.

 Information of HR Accounting
HR accounting involves collecting and analysing data related to an organization’s human
resources. The information required for HR accounting includes:

7. Recruitment and Selection costs: This includes information on the cost of

advertising, interviewing, and selecting candidates.

8. Training and Development costs: This includes information on the cost of

training programs, development programs, mentoring, coaching, and other
programs that enhance employees’ skills.

9. Compensation and Benefits costs: This includes information on salaries,

wages, incentives, and other benefits that an organization provides to its
employees.

4. Retention costs: This includes information on the cost of programs that aim to
retain employees in the organization, such as employee engagement programs, career
development, and work-life balance programs.

5. Employee Turnover costs: This includes information on the cost of losing

employees, such as replacement costs, retraining costs, and lost productivity.

6. Productivity measures: This includes information on the productivity of

employees, such as number of hours worked, projects completed, and sales achieved.
 7. Employee demographics: This includes information on the age, gender,
education level, and other characteristics of employees.

8. Employee satisfaction and engagement: This includes information on

employee satisfaction surveys, engagement scores, and other feedback from
employees.

9. HR technology systems: This includes information on the cost and effectiveness

of HR technology systems, such as HR information systems (HRIS), payroll systems, and
time and attendance systems.

10. HR metrics and benchmarks: This includes information on HR metrics and

benchmarks, such as turnover rates, cost per hire, and employee engagement scores,
that are used to measure the effectiveness of HR practices and to compare against
industry standards.

Overall, HR accounting requires a comprehensive understanding of an organization’s

human resources and associated costs. The right HR information systems and data
analytics tools can help in collecting and analysing the data required for HR accounting.
The data provided by HR accounting can help organizations make data-driven decisions
related to human resource management.

BLOCK-2 HR Costs: Concept and method of

measurement
 HR Costs concept
HR costs are the expenses incurred by an organization to acquire, develop, and maintain
its human resources. These costs are a significant portion of an organization’s operating
expenses and can include a wide range of expenses related to employee compensation,
benefits, recruitment, training and development, retention, and other HR-related
expenditures.

The cost of human resources is typically broken down into three categories:
 Direct costs: These are the costs that are directly attributable to an employee,
such as salaries, wages, bonuses, and other benefits.

 Indirect costs: These are the costs that are associated with managing and
supporting employees, such as HR department salaries, training and development
programs, and employee engagement initiatives.

 Hidden costs: These are the costs that are often overlooked or not tracked, such
as lost productivity due to absenteeism, employee turnover, or poor employee
engagement.
Effective management of HR costs is essential for an organization’s financial health. By
understanding the cost of acquiring, developing, and maintaining human resources,
organizations can make informed decisions about budgeting, resource allocation, and
strategic planning. HR professionals are responsible for managing HR costs and ensuring
that they are aligned with the organization’s overall financial goals and objectives.

Some strategies that organizations can use to manage HR costs

include:
1. Conducting regular HR audits to identify areas of inefficiency or opportunities for
improvement.
2. Developing and implementing cost-conscious HR programs, such as flexible work
arrangements and employee recognition programs.
3. Investing in HR technology systems that can streamline HR processes and reduce
administrative costs.
4. Conducting regular employee engagement surveys to identify and address issues that
may be contributing to hidden HR costs.
Overall, managing HR costs is an ongoing process that requires HR professionals to
balance the organization’s strategic goals with the need to attract, develop, and retain
a skilled workforce.

There are several methods that organizations can use to measure

and manage HR costs. Some common methods include:

1. HR Metrics: HR metrics are quantitative measures that organizations use to

track and analyse HR-related data. Examples of HR metrics include turnover rate,
cost per hire, and training and development expenses per employee. By tracking
these metrics over time, organizations can identify trends, set benchmarks, and
measure the effectiveness of their HR programs.

2. Cost-Benefit Analysis: Cost-benefit analysis is a method used to evaluate the

costs and benefits of HR programs or initiatives. It involves comparing the
expected benefits of an HR program to the costs of implementing and maintaining
that program. By conducting cost-benefit analyses, organizations can make
informed decisions about which HR programs to invest in and which programs to
discontinue.

3. ROI Analysis: Return on investment (ROI) analysis is a method used to assess

the financial return on an investment in HR programs or initiatives. It involves
calculating the monetary benefits of an HR program and comparing them to the
costs of implementing and maintaining that program. By conducting ROI analyses,
organizations can determine the financial impact of their HR programs and make
informed decisions about future investments.
 4. Benchmarking: Benchmarking involves comparing an organization’s HR costs
and practices to those of other organizations in the same industry or market. By
benchmarking against other organizations, organizations can identify areas of
strength and weakness and make informed decisions about which HR programs
to invest in and which programs to discontinue.

Overall, the method of measurement used for HR cost management will depend on the
organization’s goals and objectives. By using a combination of methods, organizations
can take a holistic approach to HR cost management and ensure that their HR programs
are aligned with their strategic goals and financial objectives.

 Methods of Measurement of HR cost

There are several methods that organizations can use to measure and manage HR costs.
Some common methods include:
HR Metrics: HR metrics are quantitative measures that organizations use to track
and analyse HR-related data. Examples of HR metrics include turnover rate, cost
per hire, and training and development expenses per employee. By tracking these
metrics over time, organizations can identify trends, set benchmarks, and measure
the effectiveness of their HR programs.
Some examples of common HR metrics include:

 Time to Fill: This metric measures the time it takes to fill a vacant position. It can help
organizations to identify bottlenecks in their recruitment process and streamline their
hiring procedures.
 Turnover Rate: This metric measures the percentage of employees who leave an
organization over a specific period of time. High turnover rates can indicate issues with
employee satisfaction, compensation, or leadership.
 Absenteeism Rate: This metric measures the percentage of scheduled work hours that
are missed by employees. High absenteeism rates can indicate issues with employee
engagement, morale, or workplace culture.
 Training and Development Costs: This metric measures the cost of training and
developing employees. It can help organizations to evaluate the effectiveness of their
training programs and identify areas for improvement.
 Employee Engagement: This metric measures the level of employee engagement and
satisfaction with their work and the organization. High engagement levels are typically
associated with high levels of employee satisfaction and performance.
Overall, HR metrics provide valuable insights into an organization’s HR function, allowing
leaders to make data-driven decisions regarding their workforce.

Cost-Benefit Analysis: Cost-benefit analysis is a method used to evaluate the

costs and benefits of HR programs or initiatives. It involves comparing the
expected benefits of an HR program to the costs of implementing and maintaining
 that program. By conducting cost-benefit analyses, organizations can make
informed decisions about which HR programs to invest in and which programs to
discontinue.
Some specific ways in which cost-benefit analysis is used in HR include:

 Evaluating the cost-effectiveness of recruitment strategies: HR departments use cost-

benefit analysis to measure the cost of various recruitment strategies, such as online job
postings, referral programs, and career fairs, against the benefits of each strategy in
terms of the quality of hires and retention rates.

 Measuring the ROI of employee training and development programs: HR departments

use cost-benefit analysis to assess the financial impact of employee training and
development programs by comparing the costs of such programs against the benefits in
terms of increased productivity, improved performance, and reduced turnover.

 Assessing the impact of employee benefits on retention rates: HR departments use cost-
benefit analysis to evaluate the costs of providing employee benefits such as health
insurance, retirement plans, and flexible work arrangements against the benefits of such
benefits in terms of employee satisfaction, engagement, and retention.

 Evaluating the effectiveness of HR policies and procedures: HR departments use cost-

benefit analysis to assess the cost of implementing HR policies and procedures, such as
performance management systems and employee engagement surveys, against the
benefits of such policies and procedures in terms of improved productivity, reduced
turnover, and increased employee satisfaction.

Overall, cost-benefit analysis is a valuable tool for HR professionals as it allows them to

evaluate the financial impact of their HR programs and initiatives and make informed
decisions regarding the allocation of resources.

ROI Analysis: Return on investment (ROI) analysis is a method used to assess the
financial return on an investment in HR programs or initiatives. It involves
calculating the monetary benefits of an HR program and comparing them to the
costs of implementing and maintaining that program. By conducting ROI analyses,
organizations can determine the financial impact of their HR programs and make
informed decisions about future investments.

ROI (Return on Investment) analysis is a financial metric used to evaluate the

profitability of an investment in relation to its cost. In HR, ROI analysis is used to
determine the financial value of HR programs and initiatives by measuring the return on
investment generated by these programs.

To conduct an ROI analysis in HR, organizations need to identify the costs associated
with the HR program or initiative and the expected benefits. The costs may include
expenses related to salaries, training, recruitment, and other related costs. The benefits
may include increased productivity, improved retention rates, and reduced turnover
costs.

Once the costs and benefits have been identified, the organization needs to calculate
the return on investment (ROI) of the program or initiative. ROI is calculated by dividing
the net benefits (benefits minus costs) by the costs of the program and multiplying by
100 to express the result as a percentage.

If the ROI is positive, it means that the benefits of the program or initiative outweigh the
costs, and the investment is considered profitable. If the ROI is negative, it means that
the costs of the program or initiative outweigh the expected benefits, and the
investment is considered unprofitable.

ROI analysis is a valuable tool for HR professionals as it allows them to assess the
financial value of their HR programs and initiatives and make informed decisions about
their allocation of resources. By conducting ROI analyses, organizations can ensure that
their HR programs are generating a measurable return on investment and contributing
to the organization’s overall success.

Benchmarking: Benchmarking involves comparing an organization’s HR costs and

practices to those of other organizations in the same industry or market. By
benchmarking against other organizations, organizations can identify areas of strength
and weakness and make informed decisions about which HR programs to invest in and
which programs to discontinue.

Benchmarking is a process used to compare an organization’s HR programs, policies, and

practices with those of other organizations in the same industry or sector. Benchmarking
is a valuable tool for HR professionals as it allows them to identify best practices, areas
for improvement, and opportunities for innovation.

To conduct benchmarking in HR, organizations need to identify the key performance

indicators (KPIs) that they want to measure, such as recruitment effectiveness,
employee engagement, or retention rates. They can then compare their KPIs with those
of other organizations in their industry or sector.

There are three main types of benchmarking in HR:

1) Internal benchmarking: This involves comparing an organization’s HR
practices with those of its own business units or departments. Internal
 benchmarking enables organizations to identify best practices within their own
organization and apply them more widely.

2) Competitive benchmarking: This involves comparing an organization’s HR

practices with those of its competitors. Competitive benchmarking enables
organizations to identify areas for improvement and develop strategies to stay
competitive in the market.

3) Strategic benchmarking: This involves comparing an organization’s HR

practices with those of organizations that are considered to be leaders in the
industry. Strategic benchmarking enables organizations to identify best practices
and opportunities for innovation that can help them achieve their strategic goals.

Overall, benchmarking is a valuable tool for HR professionals as it allows them to identify

best practices, areas for improvement, and opportunities for innovation. By
benchmarking their HR programs against those of other organizations, HR professionals
can ensure that their practices are aligned with industry standards and are contributing
to the organization’s overall success.

of
measurement of HR value
 HR valuation
HR valuation is a process used to determine the financial value of an organization’s
human capital. It involves measuring the contribution of employees to the organization’s
financial performance and assessing the value of their skills, knowledge, and experience.

HR valuation refers to the process of assessing the financial value of an organization’s

human capital. It involves determining the worth of the employees, their knowledge,
skills, and experience, and how these factors contribute to the overall performance of
the organization.

HR valuation is important as it helps organizations to identify and understand the value

of their human capital and how it contributes to the organization’s overall success. By
valuing their human capital, organizations can make informed decisions regarding their
HR investments, policies, and strategies, and ensure that they are maximizing the value
of their employees.

HR valuation can be carried out through various methods, including market-based

valuation, financial valuation, and performance-based valuation. These methods help to
assess the financial value of an organization’s human capital by comparing it with other
similar organizations in the market, determining its financial impact on the
 organization’s bottom line, and evaluating the performance of the organization’s human
capital.

Ultimately, the aim of HR valuation is to enable organizations to optimize their human

capital and improve their financial performance by ensuring that they are investing in
the right people, skills, and knowledge. By valuing their human capital, organizations can
also attract and retain top talent, enhance employee engagement and motivation, and
drive innovation and growth.

An HR audit is essentially a comprehensive review of an organization’s human resource

(HR) practices, policies, and procedures. It's like a checkup for your HR department,
aiming to identify areas for improvement and ensure compliance with regulations.
Here's a breakdown of the concept:

Purpose:

 Evaluation: Assess the effectiveness of HR practices and identify areas where they
might be lacking or could be improved.
 Compliance: Ensure the organization is adhering to all relevant employment laws and
regulations to avoid legal issues.
 Risk mitigation: Proactively address potential risks associated with HR practices, such
as discrimination or unfair labour practices.
 Strategic alignment: Align HR practices with the organization's overall business goals
and objectives.

Scope:

An HR audit can encompass various aspects of HR management, including:

 Recruitment and selection: Examining the hiring process for fairness and efficiency.
 Training and development: Evaluating the effectiveness of training programs and
employee development opportunities.
 Compensation and benefits: Ensuring fair and competitive compensation packages
and compliance with relevant regulations.
 Employee relations: Assessing the effectiveness of communication, conflict resolution,
and grievance procedures.
 Recordkeeping: Verifying the accuracy and completeness of employee records and
ensuring compliance with data privacy laws.

Benefits:

By conducting regular HR audits, organizations can:

 Minimize legal risks: Identify and address potential legal issues before they become
costly problems.
 Improve employee relations: Foster a positive and fair work environment by ensuring
consistent and compliant HR practices.
 Enhance decision-making: Gain valuable insights to make informed decisions about HR
strategies and investments.
 Boost efficiency and productivity: Streamline HR processes and identify areas for
improvement to maximize efficiency.

Overall, an HR audit plays a crucial role in maintaining a healthy and compliant work
environment, promoting positive employee relations, and ensuring the effectiveness
of the HR function within an organization.

 Concept of HR value
The concept of value of HR (Human Resources) refers to the financial contribution that
HR activities make to an organization's overall performance. It involves measuring the
financial impact of HR policies, practices, and programs on the organization's bottom
line and determining the return on investment generated by the organization's human
capital.

The value of HR can be determined through various methods, including:

1. Economic value added (EVA) analysis: This method assesses the financial value
that HR activities add to the organization by comparing the costs of HR activities with
the financial benefits they generate.

2. Human capital ROI analysis: This method calculates the ROI (return on
investment) of HR activities by comparing the financial costs of HR activities with the
financial benefits generated by them.

3. Balanced scorecard analysis: This method evaluates the overall performance of

the organization by measuring the financial and non-financial impacts of HR activities on
the organization's key performance indicators.

4. Market-based valuation: This method assesses the financial value of the

organization's human capital by comparing it with the market value of other similar
organizations in the same industry or sector.

Determining the value of HR is important for organizations as it enables them to make

informed decisions regarding their HR strategies, policies, and investments. By
measuring the financial impact of HR activities, organizations can ensure that their HR
programs are aligned with their overall business goals and are contributing to their long-
term success. Ultimately, the aim of determining the value of HR is to enable
organizations to optimize their human capital and improve their financial performance.
 Determination of HR valuation
The determination of HR value involves assessing the contribution of an organization's
human capital to its overall performance. This can be done through several methods,
including:

1. Economic Value Added (EVA) Analysis: This method measures the financial
value created by an organization's human capital by subtracting the cost of capital from
the net operating profit after taxes (NOPAT). This provides a measure of the economic
value added by the organization's human capital to its bottom line.

2. Human Capital Return on Investment (HCROI) Analysis: This method

calculates the return on investment generated by an organization's human capital by
comparing the financial benefits generated by the organization's HR policies and
practices with the costs of implementing them.

3. Balanced Scorecard Analysis: This method evaluates an organization's human

capital performance by using a balanced scorecard approach, which measures
performance across several dimensions, including financial, customer, internal
processes, and learning and growth. This provides a holistic view of the impact of an
organization's human capital on its overall performance.

The determination of HR value is important as it helps organizations to understand the

contribution of their human capital to their overall performance and to make informed
decisions regarding their HR investments, policies, and strategies. By understanding the
value of their human capital, organizations can ensure that they are investing in the right
people, skills, and knowledge, and that their HR policies and practices are aligned with
their overall business goals and objectives. Ultimately, the aim of determining HR value
is to optimize an organization's human capital and improve its financial and non-financial
performance.

 Monetary measurement of HR value

The monetary measurement of HR value involves quantifying the financial impact of an
organization's human capital on its bottom line. This can be done through several
methods, including:
1. Return on Investment (ROI) Analysis - This method involves calculating the
financial return on investment generated by an organization's HR policies and practices.
This is typically done by comparing the costs of implementing HR policies with the
financial benefits generated by those policies.

2. Cost-Benefit Analysis - This method involves comparing the costs and benefits of
an organization's HR policies and practices. The financial benefits can include increased
productivity, reduced recruitment and training costs, and improved employee
engagement and retention rates.
 3. Economic Value Added (EVA) Analysis - This method measures the financial
value created by an organization's human capital by subtracting the cost of capital from
the net operating profit after taxes (NOPAT). This provides a measure of the economic
value added by the organization's human capital to its bottom line.

4. Human Capital Value Added (HCVA) Analysis - This method measures the
financial value created by an organization's human capital by subtracting the total cost
of human capital (including salaries, benefits, recruitment, and training) from the total
revenue generated by that human capital.

The monetary measurement of HR value is important as it helps organizations to

understand the financial impact of their human capital on their bottom line. By
quantifying the financial benefits generated by their HR policies and practices,
organizations can make informed decisions regarding their HR investments, policies, and
strategies. They can also identify areas where they can improve the value of their human
capital and optimize their HR practices to improve their financial performance.

Process, essential steps in HRA

 HR Audit
HR audit is a process of evaluating an organization's HR policies and practices to ensure
they are in compliance with legal and regulatory requirements and aligned with the
organization's overall business strategy.
The HR audit is important as it helps organizations to ensure that their HR policies and
practices are in compliance with legal and regulatory requirements and aligned with
their overall business strategy. It also helps organizations to identify areas where they
can improve their HR practices to enhance their performance, reduce risks, and achieve
their business objectives. By conducting regular HR audits, organizations can ensure that
they are continuously improving their HR policies and practices to optimize their human
capital and improve their overall performance.

 Concept of HR Audit
An HR audit is important for several reasons:
1. Compliance: An HR audit helps organizations to ensure that their HR policies and
practices are in compliance with legal and regulatory requirements. This can help to
reduce the risk of penalties, fines, or legal action.

2. Risk Management: An HR audit helps organizations to identify areas of

vulnerability in their HR policies and practices and take corrective actions to reduce the
risk of legal, financial, or reputational harm.
 3. Performance Improvement: An HR audit helps organizations to identify areas
where they can improve their HR practices to enhance their performance, increase
productivity, and achieve their business objectives.

4. Talent Management: An HR audit helps organizations to identify areas where they

can improve their talent management practices, including recruitment, retention, and
succession planning.

5. Cost Reduction: An HR audit helps organizations to identify areas where they can
reduce costs associated with HR policies and practices, including employee benefits,
compensation, and training.

6. Competitive Advantage: An HR audit helps organizations to align their HR

practices with their overall business strategy, which can help them to gain a competitive
advantage in the marketplace.

In summary, an HR audit is important as it helps organizations to ensure that their HR

policies and practices are in compliance, reduce risk, improve performance, manage
talent effectively, reduce costs, and gain a competitive advantage. By conducting regular
HR audits, organizations can optimize their human capital and improve their overall
performance.

 Process of HR Audit
The HR audit process typically involves the following steps:
1. Pre-Audit Planning: This step involves defining the scope and objectives of the
audit, identifying the key stakeholders, and selecting the audit team. The audit team
should include individuals with expertise in HR policies and practices, as well as
knowledge of legal and regulatory requirements.

2. Data Collection: This step involves collecting data on the organization's HR policies
and practices through various methods such as interviews, surveys, and document
reviews. The data collected should be comprehensive and cover all aspects of HR policies
and practices.

3. Data Analysis: This step involves analysing the data collected to identify areas of
strengths and weaknesses, compliance issues, and opportunities for improvement. The
analysis should be objective and based on valid criteria.

4. Reporting: This step involves summarizing the findings of the audit in a report that
includes recommendations for improvement and corrective actions where necessary.
The report should be clear, concise, and actionable.
 5. Follow-Up: This step involves monitoring the implementation of the
recommendations and corrective actions identified in the audit report. The follow-up
should be timely, systematic, and effective in ensuring that the recommended
improvements are implemented.

In summary, the HR audit process involves pre-audit planning, data collection, data
analysis, reporting, and follow-up. By following this process, organizations can ensure
that their HR policies and practices are aligned with their business objectives, compliant
with legal and regulatory requirements, and optimized to enhance their performance.

 Essential steps in HRA

The essential steps in an HR audit (HRA) include:
1. Defining the scope and objectives of the audit: This step involves determining
the areas of HR policies and practices to be audited, the objectives of the audit, and the
desired outcome.

2. Collecting data: This step involves collecting data on HR policies and practices. Data
can be collected through interviews, surveys, sampling, and document review.

3. Analysing data: This step involves analysing the data collected to identify areas of
compliance, strengths, weaknesses, and opportunities for improvement.

4. Preparing an audit report: This step involves preparing a comprehensive report

that includes the findings of the audit, recommendations for improvement, and a
corrective action plan.

5. Implementing corrective actions: This step involves implementing corrective

actions identified in the audit report.

6. Monitoring and follow-up: This step involves monitoring the implementation of

corrective actions and conducting follow-up audits to ensure compliance and
improvement.

7. Continuous improvement: This step involves constantly reviewing and improving

HR policies and practices to ensure compliance, efficiency, and effectiveness.

In summary, the essential steps in an HR audit (HRA) include defining the scope and
objectives, collecting data, analysing data, preparing an audit report, implementing
corrective actions, monitoring and follow-up, and continuous improvement. By
following these steps, organizations can ensure that their HR policies and practices are
aligned with their business objectives, compliant with legal and regulatory
requirements, and optimized to enhance their performance.