User login

Adopting an Open-Book Management System

(October 2009) posted on Wed Oct 07, 2009

Freely sharing information can lead to better decisions by employees.


By Marty McGhie

Open-book management—opening up your financial books to all your employees—has been around for almost 40 years, but only in the past 15 years or so has this business-practice philosophy really taken root. Most companies, after practicing open-book management for at least two or three years, become true believers and strong advocates of the practice.

The over-arching idea of open-book management is exactly as it says: All of your financial information is shared with your employees on a regular basis. The goal: By giving employees all relevant financial information about the company, you enable them to make better decisions as workers. This information includes, but is not limited to, revenue, profit, cost of goods, cash flow, and expenses.

Defining the carrot
Before this process becomes meaningful, it’s critical that you first teach your employees a basic knowledge of financial statements. That means teaching them how to read your profit-and-loss statement, your balance sheet, your statement of cash flows, or any other financial reports you might use. They don’t have to necessarily understand all the details, but you should teach them the basics of revenues, expenses, net income, assets, liabilities, cash flow, and equity. Be patient; this will likely take several months of reviewing financial statements before it begins to click with all of your personnel.

Once you teach your employees some basic financial literacy and begin sharing numbers, you must then drive toward some results. In open-book management, one of the key concepts is to choose a measurement that everyone in the company will work toward together. Typically called a critical number, a scorecard number, or a dashboard number, this is a measurement that everyone in the company can focus on. It could be a sales goal, net-income amount or percentage, a gross-margin goal, or even a specific expense line item on which everyone in the company is focused.

Don’t worry about this being the magic number to carry you into the next 10 to 20 years. Try it out. If it doesn’t work, then change it to something else that everyone can be excited about. Our company has practiced open-book management for more than five years, and our goal has changed many times. The concept, however, is the same: Set a goal that everyone feels they have a part in accomplishing.


Terms:

Did you enjoy this article? Click here to subscribe to the magazine.