Author: indiafreenotes

A Statement of changes in financial position (funds statement) helps us to understands how and why a business enterprise has acquired its resources and what those resources were used for.

The statement of financial position, often called the balance sheet, is a financial statement that reports the assets, liabilities, and equity of a company on a given date. In other words, it lists the resources, obligations, and ownership details of a company on a specific day. You can think of this like a snapshot of what the company looked like at a certain time in history.

This definition is true in the sense that this statement is a historical report. It only shows the items that were present on the day of the report. This is in contrast with other financial reports like the income statement that presents company activities over a period of time. The statement of financial position only records the company account information on the last day of an accounting period.

The objectives of funds statement are:

(i) To summarise the financing and investing activities of the entity, including the extent to which the enterprise has generated funds from operations during the period and

(ii) To complete the disclosure of changes of financial position during the period.

Preparation of Statement of Changes in Financial Position

Concept of Funds

A statement of changes in financial position can be prepared using different concepts of funds as a basis. For instance, statement of changes in financial position may focus on changes in working capital, cash, or total financial resources of a business enterprise.

Accordingly, the preparation of the following types of statement of changes in financial position:-

(i) Statement of changes in working capital, popularly known as Funds Flow Statement or Statement of Sources and Applications of funds.

(ii) Statement of changes in cash popularly known as Cash Flow Statement.

(iii) Statement of changes in Total Financial Resources.

Main Steps in Preparing the Statement:

In order to prepare a statement of changes in financial position on a working capital basis, it is necessary to have balance sheets at two points in time and an income statement covering that span of time.

The steps involved in preparing the statement are as follows:

• Determine the change (increase or decrease) in working capital.
• Determine the adjustments account to be made to net income.
• For each non-current account on the balance sheet, establish the increase or decrease in that account. Analyse the change to decide whether it is a source (increase) or use (decrease) of working capital.
• Be sure the total of all sources including those from operations minus the total of all uses equals the change found in working capital in step 1.

General Rules for Preparing Funds Flow Statement, Working Capital Basis

The following general rules should be observed while preparing funds flow statement:

1. Increase in a current asset means increase (plus) in working capital.
2. Decrease in a current asset means decrease (minus) in working capital.
3. Increase in a current liability means decrease (minus) in working capital.
4. Decrease in a current liability means increase (plus) in working capital.
5. Increase in current asset and increase in current liability does not affect working capital.
6. Decrease in current asset and decrease in current liability does not affect working capital.
7. Changes in fixed (non-current) assets and fixed (non-current) liabilities affects working capital.

Significance of Statement of Changes in Financial Position :Working Capital Basis

A better understanding and analysis of the affairs of a business enterprise requires the knowledge about the movements in assets, liabilities and capital which have taken place during the year and their consequent effect on its financial position. This information is not specifically disclosed by a profit and loss account and balance sheet but can be made available in working capital based funds flow statement.

The funds flow statement is in no way a replacement for the profit and loss account and balance sheet although the information which it contains is a selection, reclassification and summarization of information contained in these two statements. The balance sheet gives a “snapshot” view at a point in time of the sources from which a firm has acquired its funds and the uses which the firm has made of these funds.

The equities side of the balance sheet delineates these sources, and the asset side shows the uses. The income statement is a flow statement; it explains changes that occurred in the profit and loss account by summarizing the increases (revenues) and decreases (expenses) in net profit during the accounting period.

A funds flow statement explains the changes that took place in a balance sheet account or group of accounts during the period between dates of two balance sheets “snapshots.” it shows the manner in which the operations of an enterprise have been financed and in which its financial resources have been used.

It also distinguishes the use of funds for the long-term from the short- term. For example, it distinguishes the use of funds for the purchase of new fixed assets from funds used in increasing the working capital of the company.

Thus, it provides a meaningful link between the balance sheets at the beginning and at the end of a period and profit and loss account for that period. It should be understood, however, that a funds statement does not purport to indicate the requirements of a business for capital.

The concept of working capital is in conformity with normal accrual accounting procedures. Hence, a funs flow statement based on the concept of net working capital fits well with other statements.

Above all, working capital is also a measure of the short-term liquidity of the firm. Therefore, an analysis of factors bringing about a change in the amount of net working capital is useful for decision-making by shareholders, creditors, lenders and management.

Limitation of Statement of Changes in Financial Position: Working Capital Basis

The working capital concept of funds enlarges the problem of valuation because it includes inventory and prepaid items. Thus, the measurement of working capital flows is less precise than for cash.

A fund statement based on the working capital concept is usually a brief presentation, and many significant inter-firm transactions are not disclosed. For example, significant addition to inventories financed by short-term credits would not be shown because the two items are offset in the computation of the net change in working capital.

Furthermore, transactions not affecting working capital, such as the acquisition of plant and equipment by the issuance of equity capital, would not be included in the statement. Therefore, the funds statement in this presentation would not disclose structural changes in the financial relationships in the firm or major changes in policy regarding investments in current assets and short-term financing.

Financial analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.

1. Comparative Statements

Comparative statements deal with the comparison of different items of the Profit and Loss Account and Balance Sheets of two or more periods. Separate comparative statements are prepared for Profit and Loss Account as Comparative Income Statement and for Balance Sheets.

As a rule, any financial statement can be presented in the form of comparative statement such as comparative balance sheet, comparative profit and loss account, comparative cost of production statement, comparative statement of working capital and the like.

2. Comparative Income Statement

Three important information are obtained from the Comparative Income Statement. They are Gross Profit, Operating Profit and Net Profit. The changes or the improvement in the profitability of the business concern is find out over a period of time. If the changes or improvement is not satisfactory, the management can find out the reasons for it and some corrective action can be taken.

3. Comparative Balance Sheet

The financial condition of the business concern can be find out by preparing comparative balance sheet. The various items of Balance sheet for two different periods are used. The assets are classified as current assets and fixed assets for comparison. Likewise, the liabilities are classified as current liabilities, long term liabilities and shareholders’ net worth. The term shareholders’ net worth includes Equity Share Capital, Preference Share Capital, Reserves and Surplus and the like.

While interpreting Comparative Balance Sheet the interpreter is expected to study the following aspects:

(1) Current financial position and liquidity position.

(2) Long Term financial position.

(3) Profitability of the concern.

4. Common Size Statements

A vertical presentation of financial information is followed for preparing common-size statements. Besides, the rupee value of financial statement contents are not taken into consideration. But, only percentage is considered for preparing common size statement.

The total assets or total liabilities or sales is taken as 100 and the balance items are compared to the total assets, total liabilities or sales in terms of percentage. Thus, a common size statement shows the relation of each component to the whole. Separate common size statement is prepared for profit and loss account as Common Size Income Statement and for balance sheet as Common Size Balance Sheet.

5. Trend Analysis

The ratios of different items for various periods are find out and then compared under this analysis. The analysis of the ratios over a period of years gives an idea of whether the business concern is trending upward or downward. This analysis is otherwise called as Pyramid Method.

6. Average Analysis

Whenever, the trend ratios are calculated for a business concern, such ratios are compared with industry average. These both trends can be presented on the graph paper also in the shape of curves. This presentation of facts in the shape of pictures makes the analysis and comparison more comprehensive and impressive.

7. Statement of Changes in Working Capital

The extent of increase or decrease of working capital is identified by preparing the statement of changes in working capital. The amount of net working capital is calculated by subtracting the sum of current liabilities from the sum of current assets. It does not detail the reasons for changes in working capital.

8. Fund Flow Analysis

Fund flow analysis deals with detailed sources and application of funds of the business concern for a specific period. It indicates where funds come from and how they are used during the period under review. It highlights the changes in the financial structure of the company.

9. Cash Flow Analysis

Cash flow analysis is based on the movement of cash and bank balances. In other words, the movement of cash instead of movement of working capital would be considered in the cash flow analysis. There are two types of cash flows. They are actual cash flows and notional cash flows.

10. Ratio Analysis

Ratio analysis is an attempt of developing meaningful relationship between individual items (or group of items) in the balance sheet or profit and loss account. Ratio analysis is not only useful to internal parties of business concern but also useful to external parties. Ratio analysis highlights the liquidity, solvency, profitability and capital gearing.

11. Cost Volume Profit Analysis

This analysis discloses the prevailing relationship among sales, cost and profit. The cost is divided into two. They are fixed cost and variable cost. There is a constant relationship between sales and variable cost. Cost analysis enables the management for better profit planning.

Human Resource Management, or HRM, in India is much the same as in other countries: taking care of management and employee issues, dealing with talent development, managing benefits, and providing discipline. However, when dealing with the largest working population in the world, India has a difficult and unique challenge, which has led to some more creative solutions.

For one, India has developed an entire ministry in its government devoted to regulating Human Resources and encouraging education to ensure that there is sufficient talent in addition to the sheer volume of employees. It also has to deal with the youth of its organizations and use technology effectively to cope with the volume of employees it has. For this reason, HR in India uses social media frequently, such as LinkedIn and other resources.

With drain becoming rampant, there seems to be dearth of talent in India. There is a need to tackle this problem. India has been the principal source of human capital for the rest of the world, so it is not unusual for Indians to be absorbed by foreign companies overseas. However, India needs to take advantage of their human capital. Everyone wants to grow and learn in their jobs and make good salaries. Those of us with talent want to do our best at whatever we are good at. Everybody is trying to reach self-actualization. So, every company needs to find good talent, keep it and develop it.

Switching jobs is a trend these days and the need to retain employees has become a strategic requirement if business organizations have to have best of talent. Money is certainly not the answer to this problem because there will always be someone else who is willing to pay you more. Building a bond between the employee and the organization is critical. There is no simple formula to creating this engagement. The company needs to outlay a compelling vision, and the employee needs to believe in what the organization is trying to accomplish. As soon as the word ‘routine’ starts laying in a worker’s mind, the company has lost him. The organization should ensure that an employee is justly rewarded for his contribution and is constantly given newer, challenging responsibilities.

There is a stereotype that the HR executives don’t do any work and keep coming up with meaningless policies. The premise is not right. HR executives are not planning the strategies that they should be if they introduce meaningless policies. When there is a proliferation of policies the employees become cynical. The HR should manage their time effectively. If they spend too much time on payrolls, they’re not doing a good job as that work can be comfortably outsourced. They should devote more time to strategies that help build engagements.

Some individuals think the skills needed by a HR professional in India different from the ones needed by an HR professional in developed countries. This is not correct looking at the bigger picture. But the Indian context is different. Indian economy is growing rapidly, so that HR professional needs to act and react quicker. In the US talk about hiring a 1,000 workers, you will be talking about a number that’s three or four times greater. In India however, there is lesser uniformity when it comes to adhering to policies of movement, which seems to work.

The role of human resources (HR) has been evolving for some time. From “personnel” to “human resources,” HR is a source of expertise on people issues in a business. HR functions enable organizations to maximize the contribution of people to the delivery of the organization’s goals.

HR has become a strategic partner with the leaders of the business-to contribute to significant business decisions, advice on critical transitions, and develop the value of the employees-in short, to have a seat at the table. It is there to formulate policy and practice on people issues.

Below are the main roles of human resources in any organizations especially with businesses:

1. Strategic Partner

In this role, the HR person contributes to the development of and the accomplishment of the organization-wide business plan and objectives. The objectives of HR are established to support the attainment of the overall strategic business plan and objectives. When HR professionals are aligned with the business, the personnel component of the organization is thought about as a strategic contributor to business success.

2. Elaborate the Compensation and Benefits

Like employee and labor relations, the compensation and benefits functions of HR often can be handled by one HR specialist with dual expertise. On the compensation side, the HR functions include setting compensation structures and evaluating competitive pay practices.

A comp and benefits specialist also may negotiate group health coverage rates with insurers and coordinate activities with the retirement savings fund administrator. Payroll can be a component of the compensation and benefits section of HR; however, in many cases, employers outsource such administrative functions as payroll.

3. Responsible for Training

Training employee is important to help the new hires get acquainted with the organization’s work pattern. It is imperative for the HR department to incorporate a training program for every new employee based on the skill set required for their job. It will further also contribute towards employee motivation and retention. This training will not only be of assistance to the employee but also give the HR team an insight into the employee’s workmanship. On completion of the training, HR plays a significant role in assessing the results of the training program and grading employees on the same.

4. Employee Advocate

As an employee sponsor or advocate, the HR manager plays an integral role in organizational success via his knowledge about and advocacy of people. This advocacy includes expertise in how to create a work environment in which people will choose to be motivated, contributing, and happy.

Fostering effective methods of goal setting, communication and empowerment through responsibility, builds employee ownership of the organization. The HR professional helps establish the organizational culture and climate in which people have the competency, concern, and commitment to serve customers well.

5. Works with Compliance

Compliance with labor and employment laws is a critical HR function. Noncompliance can result in workplace complaints based on unfair employment practices, unsafe working conditions and general dissatisfaction with working conditions that can affect productivity and ultimately, profitability. HR staff must be aware of federal and state employment laws.

6. Professional Development

Closely related to training, developing your employees professionally is an added bonus for the employee as well as the organization. Enrolling the employee to attend conferences, trade shows, seminars etc that may be in his personal interest will make the employee feel cared-for and a vital part of the organization, thus increasing employee engagement. It will be beneficial to the organization by way of the employee’s added skill set. It is the HR head’s job to get to know the employee’s hobbies and areas of interest and look out for opportunities that will help them build onto those hobbies.

7. Resolves Conflicts

Where different people have different views, conflicts are almost inevitable. Whether the dispute is amongst two or more employees or between the employee and the management, an HR manager has the right to intervene and help map out a solution.

The HR should be available at the disposal of the conflicting parties and hear out their issues without being judgmental. A reimbursement in case of any loss caused and strict actions against the defaulter should be practiced for effective conflict resolution by the HRM.

Human resources are the valuable assets of the corporate bodies. They are their strength. To face the new challenges on the fronts of knowledge, technology and changing trends in global economy needs effective human resource management. Significance of HRM can be seen in three contexts: organizational, social and professional.

1. Organization Significance

HRM is of vital importance to the individual organization as a means for achieving their objectives.

It contributes to the achievement of organizational objectives in the following ways:

(i) Good human resource practice can help in attracting and retaining the best people in the organization.

(ii) Developing the necessary skills and right attitudes among the employees through training, development, performance appraisal, etc.

(iii) Securing willing cooperation of employees through motivation, participation, grievance handling, etc.

(iv) Effective utilization of available human resources.

(v) Ensuring that enterprise will have in future a team of competent and dedicated employees.

2. Social Significance

Social significance of HRM lies in the need satisfaction of personnel in the organization. Since these personnel are drawn from the society, their effectiveness contributes to the welfare of the society. Society, as a whole, is the major beneficiary of good human resource practice.

(i) Employment opportunities multiply.

(ii) Eliminating waste of human resources through conservation of physical and mental health.

(iii) Scare talents are put to best use. Companies that pay and treat people well always race ahead of others and deliver excellent results.

3. Professional Significance

Professional significance of HRM lies in developing people and providing healthy environment for effective utilization of their capabilities.

This can be done by:

(i) Developing people on continuous basis to meet challenge of their job.

(ii) Promoting team-work and team-spirit among employees.

(iii) Offering excellent growth opportunities to people who have the potential to rise.

(iv) Providing environment and incentives for developing and utilizing creativity.

Objectives of Human Resource Management

(i) To provide, create, utilize and motivate employees to accomplish organizational goals.

(ii) To secure integration of individual and groups in securing organisational effectiveness.

(iii) To create opportunities, to provide facilities, necessary motivation to individual and group for their growth with the growth of the organisation by training and development, compensation etc.

(iv) To employ the skills and ability of the workforce efficiently, i.e., to utilise human resources effectively.

(v) To increase to the fullest the employee’s job satisfaction and self-actualisation; it tries to prompt and stimulate every employee to realise his potential.

(vi) To create a sense and feeling of belongingness team-spirit and encourage suggestions from employees.

(vii) To help maintain ethical policies and behaviour inside and outside the organization.

(viii) To maintain high moral and good human relation within the organization.

(ix) To manage change to the mutual advantage of individuals, groups, the organization and the society.

(x) To ensure that, there is no threat of unemployment, inequalities, adopting a policy recognizing merit and employee contribution, and condition for stability of employment.

Human Resource Management (HRM) is the governance of an organization’s employees. HRM is sometimes referred to simply as Human Resources (HR).

The first definition of human resource management is that it is a process that will manage people in a company in a defined and structured way.

The HR is supposed to do the following tasks- staffing, hiring people, retention of employees, managing pays and perks and setting them, performance management, managing the changes and many more. This definition is a traditional one and is a modern version of personnel management.

Another definition for human resource management states that managing the people or employees in an organization can be done in a macro perspective which means that managing employees will be in the form of a relationship between management and employees.

Human resources are the people who work for the organization; human resource management is really employee management with an emphasis on those employees as assets of the business. In this article, employees are sometimes referred to as human capital.

HR professionals recruit, manage and provide direction for people who work in an organization to maximize profitability and employee satisfaction. They typically develop and administer policies related to hiring, performance management, compensation, safety and wellness, employee benefits, communication and training.

Pigors and Myers: “It is basically a method of developing potentialities of employees so that they feel maximum satisfaction of their work and give their best efforts to the organization”.

Byars and Rue: “Human resource management encompasses those activities designed to provide for and coordinate the human resources of an organization Human resource functions refer to those tasks and duties performed in organizations to provide for and coordinate human resources”.

Ivancevich and Glueck: “Human resource management is the function performed in organizations’ that facilitate the most effective use of people (employees) to achieve organizational and individual goals”.

Scope of Human Resource Management

Human resources are undoubtedly the key resources in an organization, the easiest and the most difficult to manage! The objectives of the HRM span right from the manpower needs assessment to management and retention of the same. To this effect Human resource management is responsible for effective designing and implementation of various policies, procedures and programs. It is all about developing and managing knowledge, skills, creativity, aptitude and talent and using them optimally.

Human Resource Management is not just limited to manage and optimally exploit human intellect. It also focuses on managing physical and emotional capital of employees. Considering the intricacies involved, the scope of HRM is widening with every passing day. It covers but is not limited to HR planning, hiring (recruitment and selection), training and development, payroll management, rewards and recognitions, Industrial relations, grievance handling, legal procedures etc. In other words, we can say that it’s about developing and managing harmonious relationships at workplace and striking a balance between organizational goals and individual goals.

The scope of HRM is extensive and far-reaching. Therefore, it is very difficult to define it concisely. However, we may classify the same under following heads:

(i) HRM in Personnel Management

This is typically direct manpower management that involves manpower planning, hiring (recruitment and selection), training and development, induction and orientation, transfer, promotion, compensation, layoff and retrenchment, employee productivity. The overall objective here is to ascertain individual growth, development and effectiveness which indirectly contribute to organizational development.

It also includes performance appraisal, developing new skills, disbursement of wages, incentives, allowances, traveling policies and procedures and other related courses of actions.

(ii) HRM in Employee Welfare

This particular aspect of HRM deals with working conditions and amenities at workplace. This includes a wide array of responsibilities and services such as safety services, health services, welfare funds, social security and medical services. It also covers appointment of safety officers, making the environment worth working, eliminating workplace hazards, support by top management, job safety, safeguarding machinery, cleanliness, proper ventilation and lighting, sanitation, medical care, sickness benefits, employment injury benefits, personal injury benefits, maternity benefits, unemployment benefits and family benefits.

It also relates to supervision, employee counseling, establishing harmonious relationships with employees, education and training. Employee welfare is about determining employees’ real needs and fulfilling them with active participation of both management and employees. In addition to this, it also takes care of canteen facilities, crèches, rest and lunch rooms, housing, transport, medical assistance, education, health and safety, recreation facilities, etc.

(iii) HRM in Industrial Relations

Since it is a highly sensitive area, it needs careful interactions with labor or employee unions, addressing their grievances and settling the disputes effectively in order to maintain peace and harmony in the organization. It is the art and science of understanding the employment (union-management) relations, joint consultation, disciplinary procedures, solving problems with mutual efforts, understanding human behavior and maintaining work relations, collective bargaining and settlement of disputes.

The main aim is to safeguarding the interest of employees by securing the highest level of understanding to the extent that does not leave a negative impact on organization. It is about establishing, growing and promoting industrial democracy to safeguard the interests of both employees and management.

The scope of HRM is extremely wide, thus, can not be written concisely. However, for the sake of convenience and developing understanding about the subject, we divide it in three categories mentioned above.

A procurement department is mandated to execute 3 Main Functions:

1. Manage the organization’s spending

A good procurement function is pivotal in deploying an effective Annual Buying Plan, leveraging robust forecasting, market analysis, purchasing processes, and cost reduction methodologies.

2. Support operations

Support operations by ensuring the timely acquisition of high quality, low cost, inputs and raw materials to be converted into products and services purchased by an organizations’ internal customers. An organization exists to create value for its customers. The procurement function is pivotal in supporting value creation processes.

3. Protect the organization from risk

Protect the organization from risk by deploying risk management methodologies such as Failure Mode and Effects Analysis (FMEA). Contract management, and price shock mitigation and avoidance provide huge benefits to an organization, stakeholders and customers.

Human resource planning (HRP)

Human resource planning (HRP) is the continuous process of systematic planning ahead to achieve optimum use of an organization’s most valuable asset—quality employees. Human resources planning ensures the best fit between employees and jobs while avoiding manpower shortages or surpluses.

There are four key steps of the HRP process. They include analyzing present labor supply, forecasting labor demand, balancing projected labor demand with supply, and supporting organizational goals.

HRP helps companies is an important investment for any business as it allows companies to remain both productive and profitable.

Human resources planning allows companies to plan ahead so they can maintain a steady supply of skilled employees. That’s why it is also referred to as workforce planning. The process is also used to help companies evaluate their needs and to plan ahead to meet those needs.

Human resource planning needs to be flexible enough to meet short-term staffing challenges while adapting to changing conditions in the business environment over the longer term. HRP starts by assessing and auditing the current capacity of human resources.

The challenges to HRP include forces that are always changing such as employees getting sick, getting promoted or going on vacation. HRP ensures there is the best fit between workers and jobs, avoiding shortages and surpluses in the employee pool.

To satisfy their objectives, HR managers have to make plans to do the following:

• Find and attract skilled employees.
• Select, train, and reward the best candidates.
• Cope with absences and deal with conflicts.
• Promote employees or let some of them go.

Investing in HRP is one of the most important decisions a company can make. After all, a company is only as good as its employees. If it has the best employees and the best practices in place, it can mean the difference between sluggishness and productivity and can lead to profitability.

Steps to Human Resources Planning

There are four general, broad steps involved in the human resources planning process. The first step of human resource planning is to identify the company’s current human resources supply. In this step, the HR department studies the strength of the organization based on the number of employees, their skills, qualifications, positions, benefits, and performance levels.

The second step requires the company to outline the future of its workforce. Here, the HR department can consider certain issues like promotions, retirements, layoffs, and transfers anything that factors into the future needs of a company.The third step in the HRP process is forecasting the employment demand. HR creates a gap analysis that lays out specific needs to narrow the supply of the company’s labor versus future demand. Should employees learn new skills? Does the company need more managers? Do all employees play to their strengths in their current roles?

The answers to these questions let HR determine how to proceed, which is the final phase of the HRP process. HR must now take practical steps to integrate its plan with the rest of the company. The department needs a budget, the ability to implement the plan, and a collaborative effort with all departments to execute that plan.

The goal of HR planning is to have the optimal number of staff to make the most money for the company. Because the goals and strategies of the company change over time, HRP is a regular occurrence.

• Human resource planning is what a strategy used by a company to company maintain a steady stream of skilled employees while avoiding employee shortages or surpluses.
• Having a good HRP strategy in place can mean productivity and profitability for a company.
• There are four general steps in the HRP process: identifying the current supply of employees, determining the future of the workforce, balancing between the supply and demand, and how to implement the plans.

The potential appraisal is made up of two words viz. potential and appraisal. Potential means the abilities of an employee which are required for meeting the challenges of future assignments while appraisal means the evaluation of that abilities in present status of an employee.

Thus, potential appraisal is the process of evaluation of the abilities of an employees that uses by employee in the future assignments. It is different from performance appraisal and needs to be carried out at regular intervals.

The potential appraisal refers to the appraisal involving identification of the hidden talents and skills of a person. The person might or might not be aware of them.

Potential appraisal is a future-oriented appraisal whose main objective is to identify and evaluate the potential of the employees to assume higher positions and responsibilities in the organizational hierarchy. Many organizations consider and use potential appraisal as a part of the performance appraisal processes.

The Potential for Improving Performance, or PIP, measures the performance of the average worker versus the best person performing a particular task. Large differences suggest that performance can be improved by bringing average performance up closer to the best performance. Small differences suggest little potential for improvement.

Potential appraisal refers to the identification of hidden skills, talents and abilities in a person which even he may be unaware of. It is a future oriented concept and is a powerful tool for employee advancement. The latent skills of a person are tracked and his true potential is evaluated.

An employee with high potential is a good candidate for assuming more responsibilities in future. In western countries, many organizations use potential appraisal as a part of performance appraisal process. However, in India, not many managers are aware of this term though informally every organization makes potential assessments.

Potential appraising is different from appraising performance. Poten­tial refers to abilities of an employee which are currently not brought to use by an organization. Potential means the talent capacity to under­take higher challenges on job in future.

Example of Potential appraisal

A good salesman need not be a good manager in the sales function since the job of a sales manager requires managerial qualities apart from selling skills.

Potential appraisal aims at identifying and assessing the capabilities of an individual to perform higher level of functions or responsibilities. It forms the basis for decisions associated with the promotions and succession planning.

In potential appraisal, attributes like velocity (speed and direction in which the employee is progressing), people and customer (listening skills, interpersonal relationship) orientation, focus on results, initiative etc. are assessed.

Objectives of potential appraisal:

• Identify the abilities of an employee in order to evaluate whether that employee is suitable for future assignments or otherwise, and
• Occupy higher positions in the organizational hierarchy and undertake higher responsibilities because past performance may not be a good indicator for future and higher role.
• Inform employees about their future roles;
• Make suitable corrections in training efforts from time to time;
• Inform employees about they must do something for their career prospects;
• Help organization for suitable succession plan;
• Improve quality and quantity of performance of an employee; and
• Give proper feedback to the employees for their potential.

Features of Potential appraisal

Potential appraisal forms an important part of HRM in finding out the hidden talents of employees.

The following are the features of potential appraisal:

• Helps assess the employees’ capacities, which pave way for them to give their best performance
• Helps assess an organization’s ability to develop future managers
• Helps assess the employees’ analytical power, which indicates the ability to analyze problems and examine them critically
• Helps build creative imagination, which is the ability of presenting an existing thing in an unconventional and new manner
• Helps analyze the sense of reality, which refers to an employee’s way of interpreting a situation
• Helps develop leadership skills, which refer to the abilities to direct, control, and harmonize with people.

Four Main Mechanisms of Potential appraisal

Potential appraisal presupposes the existence of clear-cut ‘job or role descriptions’ and ‘job or role specifications’, i.e., qualities needed to perform the role.

The mechanisms that could be used for potential appraisal are discussed below:

1. Rating by Superior

The potential of a candidate could be rated by the immediate supervisor who is acquainted with the candidate’s work and also his technical capabilities.

2. Psychological Tests

Managerial and behavioural dimensions can be measured through a battery of psychological tests.

3. Games

Simulation games and exercises (assessment centre, business games, in-basked, role play, etc.) could be used to uncover the potential of the candidate.

4. Performance Records

Performance records and ratings of the candidate on his previous jobs could be examined carefully on various dimensions such as initiative, creativity, risk-taking ability, etc., which might play a key role in discharging his duties in a new job.