Open Book Management in 3 Easy Steps
A 2016 Robert Half report found that 25% of privately held companies share all their financial information with their employees, an increase in 18% from just four years prior.[1] This trend demonstrates that financial transparency is moving from a fringe practice to a mainstream one . . . because it works!
Choosing transparency builds a culture of involvement and engagement. When employees are personally involved with and engaged in the company’s financials, their commitment to achieving the annual goals naturally rises. Your whole team—rather than just you alone—is focused on their roles in the company’s goals. As you share financial information, the team sees in real time how the company is progressing and contributes effectively to its forward movement. Naturally, you’ll move faster, further, and with more ease with your entire team helping.
If team engagement is new for you, it is going to feel clunky and awkward at first. Stick with it. Be open. Tell your team you are learning too. You’ll improve over time.
Start with Financial Education
Before you begin sharing, build your team’s financial acumen. The more financially savvy they are, the more they can help.
This is where most business owners begin to melt down when it comes to sharing. They believe that employees are going to be shocked by how much money the company is making. The fear is that employees will see the net income and think you should share more of the pie. The truth is, they already have some idea of what your annual sales are. Unless you educate them, they will decide for themselves what the company’s net income is, and their “guesses” are almost always far above the true net income of the company. The average person who has never owned a business has no idea what running a business really costs. Educating your team on what it costs to do so is essential.
There are 3 segments you can teach in order to produce a more motivated and successful team.
Educate employees on financial terms.
Before diving into the nitty-gritty of financial reports, educate your employees on the meaning of basic financial terms, such as revenue, gross margin, net income, and any other key metrics you use to evaluate your company’s financial picture.
Teach employees about how income is produced.
Once they have the terms down, teach them about how income is produced.
A simple way to teach your team members about the cost of doing business is to place one hundred pennies on a table. Begin by asking them for every one dollar (one hundred pennies) that comes in your door in terms of sales, how many are spent on labor? The cost of goods sold? The rent, equipment, and facility costs? The interest and financing costs? Technology? Marketing and sales? Other costs?
If they say twenty on labor, remove twenty pennies from the pile. On a flip chart, note their answers for each section, each time, removing that many pennies from the pile.
When they have finished guessing the amount of each cost, put all the pennies back in the pile. Then go through the exercise a second time, taking out the number of pennies that represent the real costs. Write those numbers on your flip chart right next to their guesses. Compare the number of pennies left after all the real costs are paid—the company’s true profit versus the team members’ guesses of the profit. Freely answer their questions and talk about ways you strive to improve profit.
At the end of the exercise, talk about why profit matters. It is a return to the owner for the risk of their investment, personal guarantees for debt, and hard work. Profit is also what allows the company to invest in future technology and equipment, build cash flow for future expansion, add more lines of business, and hire more team members as the company grows. Speak to them from your experience and answer any questions that arise.
This is a simple exercise. To grow your open-book culture with new hires, repeat it as part of the onboarding process. This is especially powerful if you let one of your team members lead the exercise. As costs shift, update the exercise annually.
Set the record straight about cash flow.
For virtually all businesses, there is a difference between cash flow and profit. This is a challenging concept for most people, including many business owners. While the reasons for the differences vary based on the type of business, it isn’t unusual for cash flow to lag profit by thirty to ninety days.
A healthy cash balance is critical for business stability and growth. Companies can be profitable and still lack the cash flow to pay their vendors and employees. This is most prevalent in high-growth companies with accounts receivable and/or inventory.
First understand your cash cycle, and then teach your team how cash flow works in your business.
If you don’t know where to begin or how to get started with your financial-education program, don’t hesitate to reach out to me and my team at MACKEY™. We are here to help.[1] “Infographic Library.” Media, July 23, 2018. http://rh-us.mediaroom.com/2016-12-07-More-Privately-Held-Companies-Opening-The-Books-To-Employees.