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.

  1. 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.

  1. 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.

  1. 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.