As a small business or family business executive, do you struggle with how to explain your business results and profitability to your employees? In some cases, it might not be practical (or permissible) to share specifics due to family confidentiality desires.
I recently attended a local Middle Market Entrepreneurs breakfast. One of the discussion topics was financial transparency with employees at all levels – from executives to “the janitor.” One of the challenges we discussed was the complexity of typical financial statements prepared in conformity with GAAP (Generally Accepted Accounting Principles). This can indeed be a challenge, and even the most attentive employees can get that deer in the headlights look when discussing topics such as prepaid expenses, accruals and depreciation expense.
I related to the group an example that I have used effectively on several occasions. I create a slide in my presentation called:
“Where Does All the Money Go?“
What I put in this slide is a very simple but illustrative example. I first take an income statement and group the line items into easy to understand categories – for example, sales, salaries, benefits, marketing, rent, etc. I then express each of these expenses as a percentage of total sales. Next comes the part that makes it so easy to understand: I assume that we sell one “widget” for $100, then I show how this $100 will be spent by applying the expense percentages calculated earlier. This really brings it home to employees and increases their level of understanding of what it takes to run a business (versus thinking that 80-90% of sales revenue goes into the CEO salary line item!).
Using hypothetical numbers, here is a brief illustration. Let’s say the Company sells Product A for $100. Here’s how the company uses those sales proceeds:
This type of example never fails to make the lights come on, and it helps people understand what it really costs to operate a business, market its products/services and take care of its employees. A side benefit: it can also trigger employee ideas for cost savings and other efficiencies, empowering them to “run it like they own it.”