The Great Game of Business – Chapter 5 section 2 (part 8 of 17)

Overcoming Your Fear of Disclosure

The Great Fear #1: What if your competitors get hold of your numbers?

The notion of opening up the company’s books strikes terror in the hearts of many CEOs, who shudder to think that the numbers might fall into the wrong hands – like their competitors’. I have to admit that, in the beginning, our numbers were so bad it didn’t matter whether or not our competitors saw them. Then, as we began teaching people the numbers, we could see our company get stronger, and so we worried less about our competitors because they weren’t strengthening themselves in the same way.

The Great Fear #2: Is it your competitors you fear – or your own employees?

Sad to say, a lot of companies hide their financials not because they’re afraid of their competitors, but because they’re afraid of their employees. They don’t think people will understand the numbers, and there’s some truth to that. If you don’t show employees how to use financial information as a tool to help the company, they might well use it as a weapon against the company. I still think you’re better off in the long run being open with financial information. When the numbers are hidden, people make assumptions, and they’re often crazy ones. Nine times out of ten, people think a company has a lot more money to spend on wages and salaries than it does. They’re trained to think big, and they don’t understand business. It’s amazing, for example, how many people confuse profit with sales.

The Great Fear #3: What do you reveal if your numbers are bad?

The CEO of a screen-printing company came up to me after I had given a speech to business group in California. “I love your message,” he said, “and I love the way your run your business, but I could never let my people see all our company’s numbers. They’d leave if they knew how bad we were really doing.” I said, “Does that mean you only show them good numbers?” He said, “Yeah, I show them good numbers to keep them motivated.” I said, “Do they trust you?” He said, “No.” … The truth is that you’ve got to give people the bad as well as the good. It’s the only way to build trust, and you must have trust, if only because you’re bound to make mistakes.

How to Be An Open-Book Manager

Sometimes I think what I’m really doing is conducting an orchestra. … I’m Lawrence Welk, going “ah-one and ah-two.” My job is to keep the rhythm going. I keep things on schedule, on time. That can be tricky because conditions are always changing. You need to be flexible, but you also need structure. What’s essential is to make sure that everybody is playing from the same scorecard. Our scorecard is a set of financial statements, notably the Income Statement and the Balance Sheet

We mix all kinds of metaphors in explaining those documents to people. I usually tell them that the balance sheet is the company’s thermometer. It lets you know whether you’re healthy or not. An Income Statement tells you how you got that way what you can do about it. … Don’t rely on the kind of financial statements provided by CPAs. Those statements are designed to give outsiders – investors, tax collectors, bankers – the information they want to know about a company. Employees need something a little different. The general form is the same, and the standards of accuracy should be just as high, but the detail has to be broken down in a way that sheds more light on what’s happening inside the company.

How you do that depends entirely on your business, but here are some general rules to follow:

  1. Start with the income Statement. It is the best tool you have for drawing people into the action of the game because it is constantly changing. As a result, it lends itself to demonstrating cause and effect. You can use it both to monitor the action as it unfolds and to show people their role in determining whether or not the company makes money.
  2. Highlight the categories where you spend the most money. Those are obviously the ones that are going to have the biggest impact on your company’s profitability, so you want to monitor them very closely.
  3. Break down categories into controllable elements. If labor is a variable expense, you want people to see it vary. If you use trucks in your business, people should know how much you’re spending there. In a sales organization, you’d keep a close eye on travel, entertainment, and other selling expenses; in a professional service firm, you’d probably want to break down billable hours. The whole idea is set up the income statement in a way that lets people observe the effects of what they do.
  4. Use the income statement to educate people about the balance sheet. While the action may center around the Income Statement, it is the Balance Sheet that tells you the real score – how secure jobs are, how much wealth has been created, where the company’s vulnerable. You ignore it at your peril. Once people get the hang of the Income Statement, moreover, it’s a fairly simple matter to show them how the changes there produce changes in the Balance Sheet. Use the same principle of breaking down large Balance Sheet Categories to illuminate cause and effect.

Above all, develop a set of financial statements that works for your particular business. If you have a chain of clothing stores, your internal statements will wind up looking very different from those you would develop if you had a travel agency. … But the process by which you would come up with your statements would not very much at all.

At SRC, we break out the various costs involved in the manufacturing operation. Typically, these costs would be lumped together in the Cost-of-Goods-Sold line on the income statement. That may be adequate for a banker, but it doesn’t tell us very much about what’s really going on in production, where most of our people work. We want them to see exactly what effect they are having on profits, so we break down the Cost-of-Goods-Sold line into its basic elements – material, labor, and overhead. Every week, the various departments forecast whether, and by how much, they are going to be over or under budget for the month. Then, after the month’s close, we produce a hundred-page set of financial statements showing exactly what happened where and how each person contributed.

Visitors sometimes find all this a little overwhelming. I tell them to bear in mind that we didn’t create this system overnight. It took us years to develop all the mechanisms we now have for keeping people up to date on the numbers, and we’re sill coming up with new ones. But we started out very simply. In the first year, your chief financial officer would put together a daily report like chicken scratch for the bank showing where our cash was, where our inventories were, where our receivables were, what we owed, and so on. That would be passed around the company. People got curious. They would come down to the front office in the morning and ask, “What do we owe today?” From there, the reporting system just grew and grew.

Employees wanted to see exactly where they fit into the process; … Their questions told us what information we should be reporting. Management’s role was to instill the desire to know. We did that by a variety of methods – through the bonus system, the weekly meetings, and all the other games we developed along the way.