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5 Lessons for Growing a Business
Originally published: 11.01.07 by Theo Etzel
An archer stands tall, takes an arrow from his back-slung quiver, notches his arrow in his powerful bow, draws the bow taught for maximum effect, eagerly raises up to sight the target — but wait, where's the target?
Better yet, what's the target? Who decided on the target? Pretty much a waste of energy on his part, especially when he lets the arrow fly and someone says, "Nope, didn't hit the target this time." "What target?" he says with valid frustration.
This is the same scenario our staffs face if we do not involve them in the business by sharing key financial data with them. Remember, the numbers are the target of the company. If people don't know what they are aiming for, they can't respond accordingly to make necessary corrections along the way.
Opening the books up and seeking employee involvement is a great motivating method. While the payoff is worth it, the process involves time, education, and trust.
Open book management has different meanings to different people. Some run scared when the concept is mentioned thinking that everybody will
Somewhere in the middle is going to be the best place for you to go with this concept. That means enough meaty information to be useful and analytical but not so detailed as to get people focused on the wrong things. The decision as to how deep in the organization to share what numbers is also discretionary.
Conditioned Air has been using open book management with its managers for the past six years. Prior to that there was an informal, limited amount of information shared and results were hampered by this action. Once we formalized the process of reporting the facts and figures, company performance took off.
Today, a monthly financial meeting with all the department managers is held to review the prior month's performance and year to-date performance. Each department is shown as a profit center and all overhead accounts are shown in sum total by account. Therefore, payroll shows up as one number, not by names and salaries.
We do not departmentalize overhead accounts due to my team philosophy and abhorrence to building walls and silos between departments. Each department sees its gross revenue, direct costs, and gross profit. Warranties also are broken out by department and other general information is divulged and discussed. (See the example of a monthly financial disclosure sheet on page 21.)
Equally important, each department managerand their staff is involved in setting goals and targets for the year and these then become the building blocks of the budget. Of course, I have a say in that but I rely heavily on each manager to assess their production capabilities to achieve their goals. This is the first step in connecting them in the business and not just wondering if they make a difference or not.
We do have a hierarchy of information for employee levels that we practice. This is the part where you have to decide who gets to see what and how often. Somewhere between the previously mentioned extremes is going to be right for you. I don't think there's a one-size-fits-all solution for this. The goal is to make it understandable, accurate, timely, appropriate for each level, and results oriented.
We show full disclosure of numbers to all our managers. I let all employees know what the level of business is and how we've grown. We are currently working on a formal office staff disclosure of appropriate information. Of course, productivity levels, job cost analysis and the like are discussed — that's a two-way conversation — with job supervisors and service techs on a weekly or monthly basis.
For example, having a job supervisor believe that a job is going smoothly and should be a good job for us isn't enough. Knowledge of how we expect the job to come in (the target) and then periodic reviews lets him know how the job is really performing. This approach helped one supervisor focus in on the importance of change orders and accurately account for costs to produce better results.
Consequently, more attention was placed on these important factors and job gross profit went up significantly, beating expectations. The result came from his understanding of what direct impact he could have on the job with focused attention to the target. He is a better and more involved teammate today.
The process of open-book management starts with education. You wouldn't send an uneducated person to work on a sophisticated piece of equipment and expect very good results. So it is with financial education and technically trained people.
Most of our managers haven't had experience with the in-depth use of financial documents such as balance sheets, profit and loss statements, cash flow analysis and over and under billing reports. Their education was more geared toward the skill sets of their respective department disciplines. We spent a lot of time going over how to read financial statements and showing, by mathematical examples, the way different transactions affected the statements. In essence, Accounting 101. This also showed the impact of seemingly small expenses or losses in gross profit and how they quickly added up into "real money."
From time to time we share other more general financial concepts with all employees and how their actions impact the performance of the company. Some skeptics would say that the employees in the field might not really care about what safety has to do with the workers' comp premium since they still see their paycheck and the premium doesn't truly affect it. Or does it? This is where education and philosophy come in.
On more than one occasion I have shared my "Box vs. Funnel" theory of business: Conditioned Air is not a box where we print money. No business lives to print money and employ people. Rather, we are a funnel that has customers spend their hard-earned dollars with us in return for goods and services that we provide. Down the funnel the money goes and bit by bit it is spent on all things necessary to run the business.
If we have played the game well, spent those dollars wisely, and delivered a value to our customers in an efficient way, we have some pennies left from that dollar to reinvest in making us better. If we don't do our jobs to the best of our ability with all the tools available to us (such as open book management), customers just might stop voting for us with their dollars and the paychecks go away. Everyone has a stake in making sure we are the company with which people continue to want to spend their money and trust.
The next investment in this process is time. It will take time to educate and get people up to speed with full understanding. If you have a chief financial officer, he should be able to put together a basic course on financial statements. If not, you may be skilled enough to do so. Outside sources include a local CPA, community college continuing education course or numerous management books. It takes time to move from the first reviews of numbers that seem overwhelming to being a part of the budgeting process and comfortable with the numbers. The more they are discussed the deeper the understanding.
Your job is to set initial targets and performance benchmarks to judge actual performance against. The investment in time also includes patience. It is a patient process to turn a large ship around, and likewise, it takes time to see the results from more clearly defined targets. But the results will come and they can be far better than expected.
Indeed, we found that people want to exceed the goals and work very hard at improving efficiency to do so. Customers will not pay for your inefficiency. The market place will keep that in check through pricing. The more efficient you are at delivering your services, the more customers you can attract. But how can anybody know they need to be more efficient if they don't know the numbers?
Trust is the third element in this process. You have to trust that people will use this information in the way in which it is intended, to better the business and improve their job performance. If they don't, then you don't need or want them on your team.
As a side note, I firmly believe that people directly responsible for the performance of the company should have a stake, or reward, in that performance. This becomes a motivating factor. They want to know where the company is and what has to be done to do better. Of course someone could take the numbers with them if they leave. But I already trust each of them with two of my biggest assets: the employees that work directly for them and the customers with which they interact. This is just one more way that I show my team that I trust them. I haven't been disappointed.
People's biggest fear of sharing numbers is that the competition might find out. I say, "So what?" Just because they know how much you do somewhere doesn't mean they can do what you do and how you do it. I don't mean to say I post my detailed numbers in a chat room on the Internet, but I'm not going to lose sleep over this fear since it is of little use to my competition. We treat the information with the respect it deserves and hold it close for our use.
But one snapshot of information does not give anyone else a competitive advantage either. We are a far better company for sharing the information strategically than we would be had we never disclosed the targets and results in the first place.
Opening your books for review means opening a piece of yourself, too. If you truly want a team approach to your business where people are fully invested in the numbers, then you have to let them in on the numbers.
Sharing financial information without first educating people is dangerous and unfair to your staff. Showing them that you trust them with more of the business is a great incentive to show trust back to you. Judging performance without disclosing expectations is a recipe for disaster for both you and your employees.
Invest in them and they will far surpass your expectations as they learn the difference between thriving and merely surviving. Arrows need targets to be effective — so do your people.
Theo Etzel is the CEO of Naples, Fla.-based Conditioned Air. He is a seasoned business executive and passionate entrepreneur who believes in providing the highest level of customer care, services and products to his clients. For additional information, visit www.conditionedair.com.
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