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CTDO Magazine

Boost Your Financial IQ

Friday, October 14, 2022

By understanding relevant financial factors, you can show the value of learning.

Before mentioning the word cost with talent development professionals, prepare for some defensive rebuttals. That is a natural human reaction, because cost carries a negative connotation, implying a loss.

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Every operational activity falls under one of three types of responsibility centers: profit, cost, and investment. By definition, talent development is a cost center, which means it's an operational activity that incurs expenses and costs but does not generate revenue from selling its goods and services.

While TD is a cost center, it's not alone. Organizational leaders assess many supporting functions as such, including accounting, HR, IT, and even production.

None is expected to deliver a profit, and neither are TD practitioners. Instead, a cost center's activity and expenses indirectly contribute to the business's overall ability to increase the bottom line by helping profit centers increase revenue or minimize costs.

However, the C-suite will evaluate a cost center's performance based on how well that center manages and applies costs. TD leaders often falsely believe other leaders within the business expect them to continually reduce expenses. Rather, smart business leaders will rely on cost centers like TD to demonstrate how their expenses will positively improve operational performance.

Leaders in every business line evaluate operational activities through specific financial lenses. The TD function is no different.

As a TD leader, you must demonstrate learning's value as well as financial accountability for your efforts. The first step is to develop your financial competence, because that is the common language stakeholders speak.

Relevant costing

Stakeholders expect every cost and proposed expenditure to demonstrate value. That is referred to as relevant costs. When making potential business decisions and spending allocations, eliminate unnecessary costs. To help allocate essential resources to the effort, focus only on financial data directly affecting decision making.

Typically, every cost is based on how money is allocated and used to achieve certain expectations. Leaders apply the terms expenses, costs, and investments.

Each involves spending money, but they differ in financial accountability and performance. Those necessary differentiations are important when pitching a business case for TD.

Expense. Financial professionals refer to this as a period expense because the activity's cost is accounted for within the period it occurs, and there's no future tangible performance evidence (beyond the time period in which it happens). Training events such as onboarding employees, compliance training, and supporting knowledge needs for existing staff are examples of training period expenses.

Those making operational decisions recognize those events as necessary or expected. They accept that L&D support is required for the organization to function effectively.

They'll give you the money (within justifiable reason) to ensure employees are skilled and ready to do their jobs. Your accountability is to meet associated performance expectations for the money expensed.

Costs. These expenditures are directly related to the product or service sold. Accounting specifically calls them cost of goods sold or cost of sales.

Costs aren't often a concern for TD practitioners unless, in rare circumstances, training costs are directly attributable to a company product—for example, the full cost of a specialty coffee at a coffee shop includes the associate learning to make that beverage. L&D costs become relevant when you are required to develop the product. If so, itemize and account for the learning costs within the cost of the product or your learning effort.

Doing so demonstrates to operational leaders cost relevance or, in lay terms, why L&D is needed and how it will contribute to achieving performance expectations. Relevance forces you to only include costs adding tangible, sustainable value and avoiding nice-to-have elements.

Investments. For decision makers, this term has a specific financial intent. Investopedia defines an investment as "an asset or item with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. … [T]he intent is not to consume the item but rather to use it in the future to foster growth or create wealth."

That definition enables senior management to determine whether your L&D effort is an investment. In most circumstances, L&D is not an investment but a period expense. An investment is typically long term (over years) and tangible (but not always). The measure of any business investment is through the return it's expected to deliver over its useful life.

However, L&D requires qualifiable elements—such as learning technologies like learning management systems, e-learning tools, or IT requirements—that operational leaders consider tangible, value-creating investments. When pitching a business case for L&D, differentiate learning activities from tangible learning assets.

Next, itemize the relevant expenditures for each. For the learning activity (training course), qualify whether the proposed expenditures are expenses or whether they are part of the cost of sales.      

With respect to the learning assets, work with your IT team to ensure feasibility and with the finance team to financially quantify the required contribution and expected return over the life of the investments.

That is the return on investment for those tangible capital investments and is the decision-making element required to deliver a convincing business case for L&D.

Forecast and budget

Senior and operational leaders plan every operational activity to meet short- and long-term objectives. Planning permits stakeholders to allocate scarce organizational resources to areas delivering the most value for growth. Leaders accomplish that through financial forecasts and budgets.   

While both look to future financial expectations, a forecast is about planning for long-term strategic growth, whereas a budget acts as an operational control tool focusing on immediate and shorter-term expectations. Be conscious of L&D allocations within strategic and operational budgets and forecasting and budgeting for the learning function.

Learning allocations. While decision makers don't expect to recover incurred L&D costs in a forecast or budget, the budgeted amount for L&D must deliver increased value and effectiveness, leading to improving operational performance. That can be through improved productivity or efficiency or even indirectly contributing to revenue growth or profitability increase.

Every learning solution is an additional expense to both forecasts and budgets. It's essential to only include what's necessary or relevant. Management refers to that as being lean.

A forecast, however, offers latitude and flexibility to costing out training solutions that help find the optimal mix and best fit. Once agreed, costs are committed to the internal client's operational budget, and the TD team must fulfill learning expectations. Simply put: You're having an impact on their financial performance and expected performance growth. 

Budgeting. Like other cost centers, the money the learning function receives is dependent on the budget allocations from other internal activities and profit centers. Senior management expects learning leaders to budget and account for those funds accordingly and to apply that funding to department operations, support internal operational needs, and align with strategic aspirations.   

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It's especially important that you engage with various levels of operational management when allocating L&D funds to support forecasted business growth. Moving past learning needs offers unique opportunities to meet operational needs by addressing financial expectations and to appropriately budget learning costs to meet performance expectations.

Budgeting the learning function involves itemizing costs essential for effective operation. It's the same for forecasting; however, forecasting enables you to build out various, possible scenarios.

In either case, know that some internal learning requirements, such as employee needs for learning technology and tech support for specific tools, are fixed costs required to operate the L&D department. Those aren't transferable to an internal client's requests. They must be included in your department budget.

Takeaways

None of this information should negate the necessity for your learning efforts. Stakeholders recognize and accept that L&D offers an opportunity to deliver sustainable, competitive advantages. Regardless, it's incumbent upon those leading the learning function to deliver and demonstrate learning's business value.

Leaders don't only concern themselves with financial results. However, they have a fiduciary responsibility to allocate limited budgets and scarce resources to business decisions delivering the greatest value for the company.

That requires you to build a business case for learning while balancing the need to improve employee performance with meeting justifiable financial expectations. That is a cost-benefit—not cost payback—analysis where expected qualitative benefits must exceed the cost of the effort.  

Your role is to serve internal clients so they can demonstrate improvement for their efforts. Naturally, senior and operational leaders will always ask about costs.

What they're really asking you is what value the learning will add. In their minds, costs always imply added value to business expectations and contribute to meeting performance objectives.

Befriend finance, IT, and any other contributors to L&D when establishing your operational budget or when developing a case for a learning initiative. Deliver the business respect that stakeholders deserve, and fulfill the promises you make to them and for the organization.

Ajay Pangarkar is cofounder of CentralKnowledge.com and LRNOnline.com. Contact him at [email protected].

Teresa Kirkwood is cofounder of CentralKnowledge.com and LRNOnline.com. Contact her at [email protected].


Improve Your Business Literacy

Business literacy contributes to more robust learning solutions. Consider these options for expanding your knowledge.

  • Credible business and financial online resources, such as Investopedia, Corporate Finance Institute, SBA.gov, and Edspira on YouTube
  • Introductory accounting and financial textbooks
  • Accredited groups such as the Association of International Certified Professional Accountants, Certified Financial, Chartered Financial Analyst, Certified Public Accountants, and Chartered Professional Accountants
  • Online learning courses and certificates from LinkedIn Learning

Read more from CTDO magazine: Essential talent development content for C-suite leaders.

About the Author

Ajay M. Pangarkar CTDP, FCPA, FCMA and Teresa Kirkwood CTDP are founders of CentralKnowledge.com and LRNOnline.com. They are renowned employee performance management experts, organizational strategists, and leading cost-estimating specialists. They are 3-time award-winning authors with their recent workforce performance book, “The Trainer’s Balanced Scorecard: A Complete Resource for Linking Learning to Organizational Strategy” (Wiley), award-wining assessment specialist with Training Magazine, keynote speakers, and sought after by media for their workforce expertise. Help them start a “Workplace Revolution” at blog.centralknowledge.com or contact: [email protected]

About the Author

Ajay M. Pangarkar CTDP, FCPA, FCMA and Teresa Kirkwood CTDP are founders of CentralKnowledge.com and LRNOnline.com. They are renowned employee performance management experts, organizational strategists, and leading cost-estimating specialists. They are 3-time award-winning authors with their recent workforce performance book, “The Trainer’s Balanced Scorecard: A Complete Resource for Linking Learning to Organizational Strategy” (Wiley), award-wining assessment specialist with Training Magazine, keynote speakers, and sought after by media for their workforce expertise. Help them start a “Workplace Revolution” at blog.centralknowledge.com or contact: [email protected]

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