Transparency has always been important for ethical business management. So it’s no surprise that prioritizing transparency and giving your stakeholders a peek behind the curtain will have a positive impact and grow your business.
One strategy businesses use to improve transparency is open book management. Businesses that have used this strategy have seen increased engagement and retention from their employees by showing a direct connection between their efforts and your business results.
Is open book management the right move for your business? Learn the pros and cons, what reports to generate, and more.
The basics of open book management
Using open book management means sharing your full financial statements and relevant operating data with your employees and stakeholders. This allows your employees to see how their efforts impact your business, which usually inspires greater investment in their work.
Managers and business owners typically use a top-down approach to motivate employees through broad goal-setting and performance evaluations. With open book management, you empower your employees to maintain or increase their productivity by seeing how it helps the business grow.
Here are a few aspects of your business that you’ll need to consider to start using this strategy.
Training your staff on financials
Establishing open book management for your business involves more than just showing your staff the business’s income statement and balance sheet. You’ll need to provide training so they can understand the information in these reports, particularly the difference between direct costs and indirect costs.
For example, if you break down your costs per product sold, you’ll need to explain to your employees that some of these costs don’t rise and fall in line with customer volume.
If a product has 75 cents in labor cost per unit when 1,000 units per month are being sold, and 15 cents in labor cost per unit when 5,000 units per month are being sold, your employees may think that they’re being paid unfairly. However, this decrease is because labor costs are fixed while sales volume can change.
A good alternative when talking about per-unit sales would be using the contribution margin per unit instead. This way you can explain how much is made per unit to cover your business’s overhead, including your employees’ salaries.
You’ll also need to train your staff on how to read a balance sheet. Your employees that don’t work in finance might not understand that balance sheet information is cumulative, meaning it builds on previous data. Showing a comparison or a period-by-period balance sheet can be helpful (such as month-over-month or quarter-over-quarter, for example) because it shows where your business stands at that moment. With this view, they’ll see how much debt you have, if your business is effectively managing its funds, and if you’re building equity (which could be a source for employee bonuses).
What reports should I share?
Your top-level financial reports should always be presented, but there are more specific reports that can be even more impactful. Here are some other reports to share with your employees and stakeholders:
Labor utilization report
A labor utilization report is typically used by construction and professional services businesses because it shows how much employee time has been used toward billable work for clients. Even if your business isn’t in those industries, you may find that this type of report shares useful information.
First, it reminds your employees of their goals and gives them an opportunity to reflect and offer feedback on them. Second, it clearly shows their performance in reaching those goals and can explain how and why you choose to hire additional people. The statistics in your labor utilization report will also help your employees better understand fixed and variable costs.
Cash flow report
Your cash flow report shows how much money is left after your business pays all of its regular daily expenses. This report can be even more important than profitability when it comes to setting expectations. Seeing your business’s current cash balances and trends can easily point to financial difficulties or progress toward your business’s goals.
Budget versus actual report
A budget versus actual report is a great way to get your employees involved in meeting revenue and expense targets. Keeping accurate budgets for expense accounts ensures your employees are thinking carefully about the spending they’re doing on behalf of your business.
By sharing revenue targets, you can show your employees how their work is contributing towards the business’s overall goals. This report can even help motivate employees if their bonuses are tied to the targets set in your business’s projections.
Accounts payable and receivable
Understanding your business’s accounts payable and receivable reports can motivate your employees when their job is related to collecting payment from customers or paying expenses. The information in this report, along with your business’s cash flow report, will show them how they can better support your business’s cash balances.
How to handle owner compensation
Opening up your books means your employees will see how much you’re taking home from your business. But it also sheds light on the risks and potential rewards that you have as a business owner.
Even though both you and your employees work for the business and depend upon its income for your livelihood, you take on significantly more risk and costs for your business as the owner. This includes everything from contributing your own working capital to making personal guarantees for your business space and debts.
If your business has an employee profit-sharing or employee stock ownership program (ESOP), using open book management can shift the focus from how much you get paid to how everyone contributes to the business.
Open book management: a gradual goal
If you want to implement open book management, remember that doesn’t happen overnight. Make sure you establish goals and timelines while also working on cultivating a culture of openness and transparency. You’ll need systems in place to provide regular reporting, resources to train you employees, and plenty of time to for open conversations across the business.
If you’re exploring open book management for your business, Pursuit’s Business Advisory Services team can help! Our team of expert advisors can guide your business through the process and what you’ll need to make it a success. Reach out to us today to learn more about how we can work together to help your business reach higher.
