An Introductory Guide to Human resource Management

Category: Accounting

Organisations fail to give more than lip service to the adage "people are our most valuable asset". This is especially true in software intensive organisations where it is people, not machines, who perform the processes that will convert ideas into tangible products and services that support the achievement of the organisation's financial goals. Although we initially contemplated defining a separate set of goals, drivers and indicators for technology issues, we found that technological considerations are embedded in each of the other three areas. We believe that by focusing the integration of technology into the social and business (hence operational) fabric of the organisation we can come closer to bridging, and perhaps closing altogether, the traditional gap between IT and business. Since the terms "goal, driver and indicator" appear frequently in this paper and within the context of a Balanced IT Scorecard, describes the purpose of each of these elements and is useful for providing a common understanding of these terms as a basis for comprehending the concepts to be discussed.

FOCUSING ON YOUR RAW MATERIAL - IT'S A PEOPLE ISSUE

It's no secret that for many years the manufacturing industry has placed a highlevel of emphasis on supply chain management as a key driver for increasing profits. While there are many variables that must be considered as a part of effective supply chain management, undoubtedly managing the quality of the rawmaterial provided by one's suppliers and the quality of the internal processes thatwill convert the raw material into products are key to creating and sustaining aprofitable enterprise. Part of this practice has been transferred to the softwareindustry in the form of Software Process Improvement (SPI). We strive tocontinuously improve our development processes, yet we often forget about theimportance of the raw material that these processes must convert to produce better, faster and cheaper software.Software development is probably one of the most knowledge intensive industries,so how does a software intensive organisation manage the quality of its rawmaterial when the raw material itself is embedded in the knowledge of its staff?Research, experience and even common sense all tell us that there is a directrelationship between the quality of our products, the processes that produce themand the people that perform those processes. In spite of this, why is commonsense so uncommon when managing people during the course of a SPIprogramme (or any improvement initiative for that matter)?The Infrastructure & Innovation perspective of ESI's Balanced IT Scorecard (BITS)aims to provide software intensive organisations with a framework for managingthe foundation of a robust SPI programme, not just process and technical issues.As you have figured out by now, the people in your organisation are an integralpart of that foundation. Manyorganisations focus directly on increasing employee productivity because it can be linked directly to reduced development costs and cycle times. However, productivity increases are more a result of focusing on more basic human needs: People want to feel that they know what they are doing and be happy doing it where they are doing it. The diagram above tells us that focusing on employee satisfaction and competence will have the highest impact on our capacity to retain high-quality professionals and increase overall staff productivity. In the BASE III project we have developed a set of quantitative indicators for managing a series of performance drivers aimed atincreasing both the satisfaction and competence of an organisation's personnel.

EMPLOYEE SATISFACTION:

The objective of this goal is to create a motivatingenvironment for everyone in the organisation in order to have employees satisfied with their job and with the organisation they are working in. As evidenced by the drivers, there is much more to creating a satisfying software engineering culture that will attract and retain high-calibre professionals than money. In his article "No Silver Lassoes" [2], Bill Curtis states that "Becoming an 'employer of choice conjures up images of spacious offices, lavish training budgets and expensive benefits. Yet people primarily motivated by self-development and pride in technical work are less impressed by pampered environments than by a software culture that encourages and rewards professionalism."

The indicators for both the goal and the drivers related to employee satisfaction will help us answer questions such as: G How do employees feel about their work? G What does the organisation do to create a motivating environment for its employees?

EMPLOYEE COMPETENCE: The objective of this goal is to continuously enhance employee capabilities in order to ensure that the workforce can successfully perform assigned responsibilities and that the strategic competencies for the organisation to meet current and future business needs are being covered. The indicators for both the goal and the drivers related to employee competence will help us answer questions such as: G What are the core strategic competencies required for the business? G At what rate are the core competencies currently covered? G Are needed capabilities being developed? In their book "Peopleware" [3], software industry gurus Tom DeMarco and Tim Lister comment "The final outcome of any effort is more a function of who does the work than of how the work is done". By taking care of the personal and professional needs of your employees, the source of the precious raw material that will develop your products and services, you will be provided with readily available opportunities to avoid organisational entropy and boost your organisation's financial performance.

When using the BITS for managing SPI programmes, we use the elements identified in the Generic Model as a starting point for identifying potential strategies (groups of drivers) as well as indicators for monitoring those strategies. In the case of setting a goal based on Employee Competence (just as with any goal included in the BITS Generic Model), organisations can select an individual or set of drivers from those listed above as their strategy. Based on this strategy, both lag and lead indicators are selected for monitoring goal achievement and driver performance. Itshould be noted that although a specific goal may include more than 10 potential drivers, it is not practical to attempt to address each of the drivers at the same time. The very thought of doing so would generate unrealistic expectations throughout the organisation and, as such, jeopardise the credibility and probability of success of the improvement initiative.Based on the elements of the Infrastructure & Innovation perspective of the BITS, a strategy for increasing employee competence could be through addressing the Team Building & Cohesion and Coaching drivers. This strategy focuses on identifying situations in which teaming can improve performance by establishing the appropriate team for the project in a manner in which the individual skills and knowledge of each team member are complimentary to the others and team members are formally encouraged to learn from each other. As well, the organisation will focus on using the experience of the most senior people in the organisation to provide guidance and support to the most junior people for the development of knowledge and skills that improve their performance.

Both the goal and the drivers have associated indicators for monitoring their success and effectiveness. In the case of the Coaching driver, it is monitored through two indicators: Coaching Awareness and Coaching Effectiveness. The Coaching Awareness indicator provides information on how many members of senior staff are involved in coaching activities and the frequency at which the coaches interact with individuals and the team. As a result, the Coaching Effectiveness indicator tracks the number of improvement suggestions that are submitted and implemented as a result of the coaching activities.

IN SEARCH OF PROCESS EXCELLENCE?

One may ask, "Why focus on process improvement when what we really need to do is improve our products? After all, we sell products to our customers, not processes." Improvements in the software process result in measurable improvements in the software product, hence "software process improvement" implies software process AND product improvement. The focus on the software process has resulted from a growing recognition that the traditional product focus of organisational improvement efforts has not

TEAM-BUILDING AND COHESION COACHING

•Team Existence & Work

•Skills Coverage

•Intra-team Training

Activities

EMPLOYEE COMPETENCE

•Customer Feedback

•Performance

Achievement Index

•Coaching Awareness

•Coaching Effectiveness

generally had the desired results. Many management and support activities are required to produce effective software organisations. Inadequate project management, for example, is often the cause of cost and schedule problems. Similarly, weaknesses in configuration management, quality assurance, inspection practices or testing generally result in unsatisfactory product quality. Typically, software development projects have neither the time nor the resources to address such issues and additional processes and thus a broader process improvement focus is required.

Literature Review

A firm is required to maintain a balance between liquidity and profitability while conducting its day to day operations. Liquidity is a precondition to ensure that firms are able to meet its short-term obligations and its continued flow can be guaranteed from a profitable venture. The importance of cash as an indicator of continuing financial health should not be surprising in view of its crucial role within the business. This requires that business must be run both efficiently and profitably. In the process, an asset-liability mismatch may occur which may increase firm's profitability in the short run but at a risk of its insolvency. On the other hand, too much focus on liquidity will be at the expense of profitability and it is common to find finance textbooks (for e.g see Gitman, 1984 and Bhattacharya, 2001) begin their working capital sections with a discussion of the risk and return tradeoffs inherent in alternative working capital policies. Thus, the manager of a business entity is in a dilemma of achieving desired tradeoff between liquidity and profitability in order to maximize the value of a firm.

Small businesses are viewed as an essential element of a healthy and vibrant economy. They are seen as vital to the promotion of an enterprise culture and to the creation of jobs within the economy (Bolton Report, 1971). Small Medium-Sized Enterprises (SMEs) are believed to provide an impetus to the economic progress of developing countries and its importance is gaining widespread recognition. Equally in Mauritius the SMEs occupy a central place in the economy, accounting for 90% of business stock (those employing up to 50 employees) and employing approximately 25% of private sector employees (Wignaraja and O'Neil, 1999; CSO, 2003; NPF, 2004). Storey (1994) notes that small firms, however, they are defined, constitute the bulk of enterprises in all economies in the world. However, given their reliance on short-term funds, it has long been recognized that the efficient management of working capital is crucial for the survival and growth of small firms (Grablowsky, 1984; Pike and Pass, 1987). A large number of business failures have been attributed to inability of financial managers to plan and control properly the current assets and current liabilities of their respective firms (Smith, 1973).

Working capital management (WCM) is of particular importance to the small business. With limited access to the long-term capital markets, these firms tend to rely more heavily on owner financing, trade credit and short-term bank loans to finance their needed investment in cash, accounts receivable and inventory (Chittenden et al, 1998; Saccurato, 1994). However, the failure rate among small businesses is very high compared to that of large businesses. Studies in the UK and the US have shown that weak financial management - particularly poor working capital management and inadequate long-term financing - is a primary cause of failure among small businesses (Berryman, 1983; Dunn and Cheatham, 1993). The success factors or impediments that contribute to success or failure are categorized as internal and external factors.

The factors categorized as external include financing (such as the availability of attractive inancing), economic conditions, competition, government regulations, technology and environmental factors. While the internal factors are managerial skills, workforce, accounting systems and financial management practices. Some research studies have been undertaken on the working capital management practices of both large and small firms in India, UK, US and Belgium using either a survey based approach (Burns and Walker, 1991; Peel and Wilson, 1996) to identify the push factors for firms to adopt good working capital practices or econometric analysis to investigate the association between WCM and profitability (Shin and Soenen, 1998; Anand, 2001; Deloof, 2003). Specific research studies exclusively on the impact of working capital management on corporate profitability of the small manufacturing companies are scanty, especially for the case of Mauritius. The financial management of small firms in developing countries and in particular, Mauritius, a small island developing state is altogether an ignored area of research. Keeping this in view and the wider recognition of the potential contribution of the SME sector to the economy of developing countries, our study is a modest attempt to measure and analyse the trend of working capital investment and needs of small manufacturing firms. This study, therefore, attempts to assess the impact of WCM on profitability of a sample of small manufacturing companies and its results are expected to contribute to the existing literature on working capital and SMEs.

The Management of Working Capital

While the performance levels of small businesses have traditionally been attributed to general managerial factors such as manufacturing, marketing and operations, working capital management may have a consequent impact on small business survival and growth (Kargar and Blumenthal, 1994). The management of working capital is important to the financial health of businesses of all sizes. The amounts invested in working capital are often high in proportion to the total assets employed and so it is vital that these amounts are used in an efficient and effective way. However, there is evidence that small businesses are not very good at managing their working capital. Given that many small businesses suffer from undercapitalisation, the importance of exerting tight control over working capital investment is difficult to overstate. A firm can be very profitable, but if this is not translated into cash from operations within the same operating cycle, the firm would need to borrow to support its continued working capital needs. Thus, the twin objectives of profitability and liquidity must be synchronised and one should not impinge on the other for long. Investments in current assets are inevitable to ensure delivery of goods or services to the ultimate customers and a proper management of same should give the desired impact on either profitability or liquidity. If resources are blocked at the different stage of the supply chain, this will prolong the cash operating cycle. Although this might increase profitability (due to increase sales), it may also adversely affect the profitability if the costs tied up in working capital exceed the benefits of holding more inventory and/or granting more trade credit to customers.

Another component of working capital is accounts payable, but it is different in the sense that it does not consume resources; instead it is often used as a short term source of finance. Thus it helps firms to reduce its cash operating cycle, but it has an implicit cost where discount is offered for early settlement of invoices.

Review of previous studies

Although working capital is the concern of all firms, it is the small firms that should address this issue more seriously. Given their vulnerability to a fluctuation in the level of working capital, they cannot afford to starve of cash. The study undertaken by (Peel et al., 2000) revealed that small firms tend to have a relatively high proportion of current assets, less liquidity, exhibit volatile cash flows, and a high reliance on short-term debt. The recent work of Howorth and Westhead (2003), suggest that small companies tend to focus on some areas of working capital management where they can expect to improve marginal returns. For small and growing businesses, an efficient working capital management is a vital component of success and survival; i.e both profitability and liquidity (Peel and Wilson, 1996). They further assert that smaller firms should adopt formal working capital management routines in order to reduce the probability of business closure, as well as to enhance business performance. The study of Grablowsky (1976) and others have showed a significant relationship between various success measures and the employment of formal working capital policies and procedures. Managing cash flow and cash conversion cycle is a critical component of overall financial management for all firms, especially those who are capital constrained and more reliant on short-term sources of finance (Walker and Petty, 1978; Deakins et al, 2001).

Given these peculiarities, Peel and Wilson (1996) have stressed the efficient management of working capital, and more recently good credit management practice as being pivotal to the health and performance of the small firm sector. Along the same line, Berry et al (2002) finds that SMEs have not developed their financial management practices to any great extent and they conclude that owner-managers should be made aware of the importance and benefits that can accrue from improved financial management practices. The study conducted by De Chazal Du Mee (1998) revealed that 60% enterprises suffer from cash flow problems. Narasimhan and Murty (2001) stress on the need for many industries to improve their return on capital employed (ROCE) by focusing on some critical areas such as cost containment, reducing investment in working capital and improving working capital efficiency. The pioneer work of Shin and Soenen (1998) and the more recent study of Deloof (2003) have found a strong significant relationship between the measures of WCM and corporate profitability. Their findings suggest that managers can increase profitability by reducing the number of day's accounts receivable and inventories. This is particularly important for small growing firms who need to finance increasing amounts of debtors.

Clear and Tangible benefiTs

The expected rewards associated with virtual work programs are well documented and include a combination of reduced fixed costs, improved scores on human capital metrics, and the longterm benefits of building a virtual workforce culture. Organizational success stories involving a restructuring towards an increasingly virtual workforce most often focus on real estate cost savings and increased employee performance and retention. However, other benefits can include improved recruitment, organizational attraction and corporate sustainability.

real esTaTe CosT savings

Real estate cost savings associated with moving employees out of offices or facilities and removing commuting reimbursements are tangible and easily accountable savings. According to a recent article in Workforce Management, Sun Microsystems realized a savings of over $70M with 18,000 virtual workers. Meanwhile, IBM has reported real estate cost reductions of up to 60% and Nortel notes $22M in annual real estate savings associated with their respective telework programs. Most organizations can quantify the specific savings associated with a virtual work implementation, although, on average, organizations can save between $5,000 and $8,000 per employee on real estate costs alone.

inCreased employee performanCe and reTenTion

Virtual workforces have been painted as a boon to both employee productivity and retention. The and degree of increased productivity varies with different organizations, which note increases in employee productivity ranging from 10% to 43%.In some instances, the net increase in productivity is on par with the real estate cost savings. Similarly, increases in employee retention can range between 10% and 50%. A survey conducted by WorldatWork of over 600 HR professionals showed 85% of respondents reported their organization's virtual work program had a moderate or high impact on employee retention.Effective organizations frame virtual work as an incentive that adds to the overall employment value proposition without significantly impacting expenses. With stagnant salaries and unpredictable energy prices looming as big concerns for employees, virtual work provides a way to reduce an individual's cost of employment. Reduced fuel costs alone are akin to the salary increase or bonus that many organizations cannot currently offer. In addition, instead of losing a valued employee when personal circumstances dictate a need for relocation, remote work helps retain valued employees, as well as their institutional knowledge. It also eliminates the costly expense to recruit, hire, and train a replacement.

In addition to anecdotal evidence, organizational researchers are beginning to find more broad-based support for the positive impact of virtual work on organizational human capital. The emerging message is clear and robust. Virtual workers are often more productive and more likely to remain with the organization

Improved reCruiTmenT and organizaTional aTTraCTion

enefits and Talent Survey identified talent recruiting, selection, and retention as areas of increasing importance over the next three to five years. Virtual work has quickly become a key differentiator in attracting and retaining key employees. For example, Gen Y employees are known for expecting the work-life balance and flexibility afforded by virtual work .As organizations seek to battle the upcoming leadership and talent gap, Gen Y employees are a natural place to look. A successful virtual work program can be a key competitive advantage for employers seeking to add new talent.Moreover, in today's housing market, organizations are increasingly reluctant to commit substantial assets to relocate employees. Employees do not want to move and sell their own houses at highly discounted prices. A virtual work arrangement allows organizations to significantly increase their recruiting base, as recruiters do not have to be constrained to a specific geographical area. Organizations are free to go after the best talent no matter where it is, without committing significant capital to recruitment and relocation costs.

organizaTional and environmenTal susTainabiliTy

Virtual work programs also support corporate sustainability initiatives. By reducing real estate needs, organizations save on space and fixed costs such as energy. The environment benefits as well. Employees no longer commute, which helps reduce carbon output, gasoline usage, and highway congestion. Some estimates put the amount of gasoline saved into the billions annually. As virtual work continues to be adopted on a more widespread basis, the full impact to the environment and sustainability will become clearer.

overComing barriers To implemenTing a virTual WorkforCe

Organizational restructuring resulting in an increase in virtual workers and decrease in on-site employees can yield notable cost savings. However, maximizing the return on a virtual workforce is contingent upon a planned, long-term commitment to remote employees. Achieving lasting organizational benefits depends upon anticipating and addressing the hidden costs of virtual workforce management. Unexpected costs can substantially mitigate the net impact of any organizational restructuring, including a virtual workforce.

Greening & Turban (2000) found that job applicant and employee perceptions of a firm's CSR determines their attractiveness towards the organizations. Moving on the same track Cropanzano et al (2001) demonstrates that employee attitudes and behaviors are heavily influenced by fairness of organizational actions towards them. In a survey conducted by Cherenson group, a New Jersey based public relations and recruitment ad agency; in 2002 found that the most important factors affecting the reputation of an organization as a place to work in are the way the employees are treated and the quality of its products and services (http://www.hrmguide.net/usa/ commitment/employer_branding). Further Good relationships with employees also allows a company to gain additional benefits including improving their public image, increasing employee morale, and support from the community (Zappala and Cronin, 2002). Nancy (2004) while discussing the role of HR in developing CSR culture in organizations emphasized that with the growing importance of human capital as a success factor for today's organizations, the role of HR leadership has become more critical in leading and educating organizations on the value of CSR and how best to strategically implement CSR policies and programmes domestically and abroad. In view of this HR must be aware that effective CSR means respect for cultural and developmental differences and sensitivity to imposing values, ideas and beliefs when establishing global HR policies and programmes.

Redington (2005) with the help of twelve case studies, while underlining the HR professionals' key role in managing the changes required for CSR activities to succeed, stated that employees are the most neglected though most important stakeholder of the organization for conducting CSR activities. While accentuating on this issue he said that having a good reputation socially implies that a company's behaviour towards its people is consistent and is of a particular standard in which they are valued in as much as the external stakeholders. Rupp et.al (2006) accentuated that CSR plays a role about fostering positive social relationships between organizations and communities. They highlighted that employees will turn to CSR to assess the extent to which their organization values such relationships and so high levels of CSR can meet employees' need for belongingness with the organization and the society. A survey by Sirota Survey Intelligence (2007) affirmed that employees who are satisfied with their organization's commitment to social and environmental responsibilities are likely to be more positive, more engaged and more productive than those working for less responsible employers and when employees are positive about their organizations' CSR commitment, their engagement rises to 86 per cent. On the other hand, when employees are negative about their employer's CSR activities, only 37 per cent are highly engaged. Similarly, Murray (2008) on the basis of survey stated that more than one-third of respondents pointed that working for a caring and responsible employer was more important than the salary they earned and nearly half would turn away from an employer that lacked good corporate social responsibility policies.

However Fenwick & Bierema (2008) has pointed that HR department, which has the potential to play a significant role in developing CSR activities within the organization, found to be marginally involved or interested in CSR. Mehta (2003), in a survey, found that only 13 per cent of the companies involved their employees in undertaking the various CSR activities. Moreover, the employees have also been less likely to fully internalize the corporate culture (Rupp, et. al, 2006). The implementation of the CSR policy has also traditionally been in the hands of 'management' and 'employees' as the non-management workforce have been less likely to be involved in developing and implementing a policy on business responsibility towards society. There are large variations in the understanding of CSR in the head office and the local plant or sales office of an organization (Young, 2006). The perceptions of workers and management also differ about whether an organization is complying with such regulations as related to labour or working conditions (Mehta, 2003).

It has also been suggested that strategic planning is not a single concept, but one which embraces a range of approaches (Bryson and Roering, 1989), although there is little agreement in the literature regarding the substance and meaning of the concept of strategic management, since strategy can mean many things to many people (Gunnigle et al, 1997). While most of the literature on strategic planning and strategic management has its origins in the private sector (Bryson and Roering, 1989), recent developments across OECD countries reflect a growing usage of these concepts and their associated techniques in the public sector (Lawton and Rose, 1994). The extent and nature of such developments in countries such as the UK and New Zealand have been described as a shift away from traditional public administration towards a New Public Management (NPM) which places emphasis on, among other things, the role of strategic management in setting and clarifying policy objectives, as well as the adoption of HRM and culture change techniques as a means of providing more effective, responsive public services (Farnham and Horton, 1996). However, while there are numerous models of strategic management, ranging from the highly rational, structured approach to a reactive, ad hoc approach, there is a recognition that not all approaches to strategic planning primarily developed in the private sector, are applicable to the public sector (Bryson and Roering, 1989).

There is a popular maxim that human resources are the greatest assets at the disposal of organisations. In mission statements, annual reports and annual general meetings, organisations declare that "our greatest assets are our people". Mayo (2006) posits that people are often spoken of as assets, but are generally treated as cost because there is no credible system of valuing them. Fajana (2002) asserts that 65 European Journal of Economics, Finance and Administrative Sciences - Issue 21 (2010) current accounting procedures deal with human resources as expense rather than as investment. This is perhaps the essence of human resource accounting otherwise referred to as human capital accounting or human asset accounting. According to Fajana (2002) under conventional accounting system, utilization of money and materials are reported whereas, the value of human resources is seldom incorporated in financial statements. Human capital accounting relates to the quantification in monetary terms (e.g. by calculating a capital value) of human resources employed by an organisation. A well-developed system of human resource accounting could contribute significantly to internal decisions by management and external decisions by investors (Fajana, 2002). Rao (2005) opines that human capital accounting helps potential investors judge a company better on the strength of human assets utilized. Thus, if two companies offer the same rate of return on capital employed, informationon human resources can help investors decide which company to choose for investment. Until recently, the value of an enterprise as measured by the traditional balance sheet was viewed as sufficient reflection of the enterprise's assets. However, with the emergence of the knowledge-based economy the traditional valuation has been called to question, due to the recognition that human capital is an increasingly important part of an enterprise total value (Bhargava, 1991). Perhaps it was the realization of the short comings of the traditional balance sheet as a basis of business performance evaluation that led Kaplan and Norton (1992) to develop a framework that incorporates all qualitative and abstract measures of true importance of a firm, called the balanced scorecard. By focusing not only on financial outcomes but also on the human issues, the balanced scorecard helps provide a more comprehensive view of a business. This in turn helps organization to act in their best long-term interest. The financial objectives are therefore balanced with customer, process and employee perspectives. Marshal (1961) had also said that the most valuable of capital is that invested in human beings. However, unlike capital invested in other assets, the balance sheet does not exhibit this most vital asset. For a long time, Accountants have not given due consideration to the "employee value" in the enterprise. The heavy amounts incurred on recruitment, selection, placement, training and development of personnel were generally treated as revenue expenditures and debited to Profit and Loss Account of the period they were incurred. Proper appreciation of human capital accounting will help management take suitable decisions regarding investment in human resources. It will also provide comparative information regarding costs and benefits associated with investments in human assets. External users of accounting information, particularly investors will find the study very useful as it will reveal how critical the quality of human assets is to the earning potential of a firm. The study may also help human resource managers to develop management principles by classifying the financial consequences of various human resource practices and monitoring effectively the use of human resources.

Business & Stock Valuation

Business valuation is a process and a set of procedures used to estimate the economic value of an owners interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of business or part {shares} of it (Wikipedia,69 European Journal of Economics, Finance and Administrative Sciences - Issue 21 (2010) 2008). Fair market value is a central standard in measuring business value. The fair value standard incorporates certain assumptions including:

• Assumptions that hypothetical purchaser is reasonably prudent and rational but not motivated by any synergistic or strategic influence. • The business will continue as a going concern. • The hypothetical transaction will be conducted in cash or equivalents. Parties are willing and able to consummate transactions. An important element of business/stock valuation is the examination of existing economic conditions in the economy as well as that of the industry in which the business operates (Brealey,2001). Another element is the financial statement analysis. Generally, this involves common size analysis, liquidity ratios, activity ratios, profitability ratios, trend analysis and industry comparative analysis. Three different approaches are ommonly used in business/stock valuation. The income approach, the asset based approach and the market approach (Anderson, 2005). Under the income approach fair market value is determined by multiplying the benefit stream generated by a discount or capitalization rate to convert them into present value. There are several income approaches including capitalization of earnings or cash flows, discounted future cash flows and excess earnings method.Most of them are based on historical financial data. The discountor capitalization rates can be determined using different methods such as Capital Asset Pricing Model {CAPM}, Weighted Average Cost of Capital {WACC} Build up Method (Wikipedia, 2008). The theory underlining the asset-based approaches to business valuation is "value of business is equal to the sum of its parts". In other words, an investor will not pay more for business assets than the cost of procuring assets of similar economic utility.

The market approaches to business valuation is rooted in the economic principle of competition:

supply and demand forces. In a free market, competition will drive the price of business assets to certain equilibrium (Hitchner, 2003). It is common practice for investors to use Price Earnings Ratio (P/E) to determine if a company's shares are over-valued / under-valued. The primary component here is price of the stock and earnings of the company. Earnings represent profits calculated by taking hard figures into account, revenue, cost of goods sold, salaries, rents etc (Abhikins, 2006).

Company's share values involve serious effort to predict cash flow(First Trustees,2008). It also includes qualitative and subjective features of business which is known as qualitative analysis. It deals with both numerical and non-numerical data like balance sheet, profit/loss account, cash flow statements, management, employees moral, customer loyalty and brand value. Features such as quality of staff, competitive advantage, reputation etc are ambiguous. Aspects of a company such as management, employee loyalty, culture etc are sent to fundamental analysis by Human capital/Resource accounting.

Crucial ideas of human resource accounting are:

People are considered as important resources of enterprise.

Effectiveness of manpower as organizational resource is given by the way it is handled.

To make decisions in enterprise, significance of human resources and investment information are advantageous.

General objectives of human resources management are:

Helping management to take appropriate choice about investments in human resources.

Giving information about earning potential of human resources to all people.

Evaluating capability of human resource in acquiring profitability and productivity.

Relatively giving information about benefits connected with human assets investment.

Investment design in Human resources include following things:

Recruitment expenses for advertisement.

Recruiting costs.

Off job and on job training expenses.

Continual allowance, pension fund and ex-gratia payments.

Educational tour and medical expenses.

Employee's welfare fund, salary and wages.

All the above things will directly or indirectly affect human resources and organisation productivity.

Current cost of human resources can be determined after analyzing investment pattern. To attain this, current cost is described as cost with which organisation gains benefit of current nature. Current costs have less effect on future costs. Expenses used for maintenance of human resources are defined as current costs. They include salary and wages, allowances, overtime wages, bonus etc.

Human Resource cost coefficient:

Human resource cost coefficient can be predicted after determining current costs and human resource investment for few years. To achieve this Total Human Resource Cost (THRC) is discovered. THRC=HR Investment+ HR Current costs. Human resource cost coefficient can be calculated by share of each class of human resources in total human resource cost.

Times Rate of Return is another method used for evaluating importance of human resources to organization. By this production performance of human resource is directly indicated. To achieve this, total operating income of a company is taken as input completed by human resources. Operating income is distributed between various sections of human resource in cost coefficient ratio. Current costs on human resources has reduced share of operating income which resulted in significant output, credited to investments made in human resources. Times Rate of Return is calculated by dividing net operating income and net investment in human resources. Higher value of Times Rate of Return specifies high efficiency of human resources.

Per Capita Investment and Per Capita Operating Income:

Examining per capita investment and per capita operating income, capability of human resources are studied. To acquire this human resources of different classes are related with investment and operating income of human resources. High per capita investments explains interests of management for human resources, where as high per capita operating income gives effectiveness of human resources adding to income of organisation.

Criticism and Challenges of Human Capital Accounting:

Vital challenge of human capital accounting is to give significant importance to human capital. Numerous accounting methods have been expanded for measuring, developing, and managing human capital in a company. All these techniques were not accepted. Three critical methods have been accepted they are original cost method by Brumment, replacement cost method by Likert, and present value method by Flamholtz. According to Brumment training and development cost must be capitalized. His opinion was training and development is expected benefits in future. And further he advised that other costs related to recruitment must be figured as period costs.

Replacement cost method by Likert proposed that significant importance must be given to employee cost, if the employee resigns from a company due to any conditions. Ideally this consists of turnover costs of present employee and replacement cost of acquiring and developing.

Flamholtz in present value method advised that considerable importance must be given to people at present to provide future services for organisation. Hence Flamholtz described importance of a person and the services offered by them to a company.

Out of these 3 methods original cost method by Brumment has been practiced by some companies like R.G.Barry(Proffitt, 1974), Atlanta Braves, Flying Tigers Crop, Upjohn Co, and Touche Ross & Co(Paperman, 1977). Presently we have no record to evaluate validity of accounting methods. All the 3 methods do not satisfy organizational and professional interests. Companies employed in goods production are different from the firms providing services. Practically same Human Capital Accounting methods should not be used for these companies. Consider an example, in a auditing company a member maybe evaluated by number of bills they generate in a month, in the mean time an employee of manufacturing industry cannot be evaluated directly based on finished product, since product production involves several methods. Management may use Human Capital Accounting to change financial statements which is terrifying. Because of this accounting some companies like Enron, WorldCom were unsuccessful. Most of people analyzed that Human Capital Accounting gives an opportunity to management to alter financial statements.

Appelbaum and Hood (1993) criticized that allotting importance to employees may be less inspiring for some employees who give first priority to their job than the value. Some people argued that employees are assets of organisation in Human Resource Accounting , which needs huge valuation of data to manipulate. Data can be changed by management as per their requirement. Various countries have a distinct requirement which creates a barrier to follow consistent method (Gebauer, 2003). For an example, United States Generally Accepted Accounting Policies (GAAP) specifies financial reporting rules which vary for Indians and Nigerians. All the challenges and criticisms mentioned above, delay Human Resource accounting development.