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Benefitting from Open-Book Management

(April 2008) posted on Wed Apr 09, 2008

Give employees an honest approach.


By Marty McGhie

Discussing the details of your business can be pretty uncomfortable, whether it be with friends, family, or industry peers. Let’s face it, we all suffer some degree of paranoia that our competitors will find out something that will give them a significant competitive edge. However, in reality, if you’re like me, learning something about a competitor affects you very little, if any. So instead, let’s focus on how much information you’re willing to share with your employees.

I’ll describe this topic as "open-book management," and the philosophy is simple: You share your financial information with your employees on a regular basis and begin teaching them the financial impact of their daily decisions. The goal is to create a culture within your business where all employees begin to think and act like owners.

Start with the basics

Begin the process by teaching your employees how to read basic financial statements. If they don’t have at least a rudimentary understanding of what the information means, the exercise of sharing it will be futile. Walk them through a balance sheet, an income statement, and even a cash-flow statement. Illustrate how a re-do job can impact the material and labor costs on the financials, and how those extra costs ultimately go straight to the bottom line. Instruct your employees about your fixed costs and your break-even points and the importance of reaching those points in order to generate profits.

Once your employees gain a basic understanding of the financial statements, review your company’s financial performance with them at least quarterly-monthly is even better. And share the bad news along with the good, because your employees need an understanding of what causes losses as well as what creates profits. If you have a month where your company has lost money, engage in a dialogue with the employees on the possible reasons why it happened.

It may take many months before they thoroughly understand the relationships of daily production to your end-of-the-month results, so be patient but persistent. You’ll soon find that the majority of your employees will show significant interest in the business, rather than just collect a paycheck.

Work as a team

The next step involves setting up goals that will involve everyone, from management to sales to production to shipping. The goals be oriented around any financial measures you like, but the important part of the process is ensuring that everyone in the company feels like they can impact the goal, for better or worse. The attitude of your employees plays a significant role in determining the success of any program you might initiate.

Once you’ve set a goal, talk about it often. Send out regular e-mail updates on your progress. Publish it in a company newsletter. Display it prominently where everyone can see what you’re working for. Talk about the results of the past and the opportunities for the future with your goal. Do whatever it takes to keep it in the forefront of your employees’ minds.

Let everybody win

The last step in open-book management is to give your employees a stake in the outcome. Some companies offer their employees stock (or stock options) as a reward for achieving the goals the company set. Alternatively, you may offer cash bonuses or vacation days as a reward. Tie these bonuses to whatever percentage of the goal is ultimately obtained. In other words, avoid setting bonus programs that are an "all-or-nothing" situation. While in this case the reward might be a great one, if it appears to be too difficult to earn then employees may become discouraged and uninterested. The most successful open-book programs create bonus goals that are incremental in nature. Small successes garner small rewards while reminding employees that there are more significant bonuses to earn with each level of achievement.

If open-book management is functioning successfully, your employees will begin making decisions as if they’re owners of the business. Your sales team will sell products at a profitable price. Your production team will produce their jobs on time, with less waste and fewer re-dos. Your shipping team will deliver on time. And as a result, your profits will go up.

Marty McGhie (marty@ferraricolor.com) is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations.


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