Financial Training: Let your Staff in on the Numbers!
My colleagues and I recently completed a series of 10 one-hour financial training programs over 3 days for a client's conference. In attendance were many multi-unit owners and general managers. I experienced what I can only call the worst of the worst in how business owners communicate financial information to their staff.
The first worst
After one of our programs where we had taught the value of understanding your income statement and balance sheet and how they interact together, a general manager came up to me and said, "All I know about my unit is my daily sales that I see from our POS system. I know that I'm running about a $3 million operation, but I have absolutely no idea if we're making any money. How can I help my owner if he doesn't share any financial information with me?" Further conversation revealed that he had no access to any of the accounts payable, accounts receivable, or payroll information and that he was giving his notice to find an organization where he felt he could actually grow as a manager.
The worst of the worst
The next morning we presented a program on Breakeven Plus, knowing your fixed and variable costs, understanding your contribution margin, and why it is such a valuable financial tool for driving up profitability. Afterwards, another general manager came up to me and said, "Last year my unit made $300,000 profit. I got $28,000, work 50-hour weeks, and got no OT. %&@# them, I'm gone." In both cases, there is a clear lack of discernment on the part of the multi-unit owner as to how, what, and when to communicate to staff the financial status of their operation--and in this unbelievably tight labor market, how to motivate critically important general managers to stay with the organization.
Measure the paranoia
Why don't owners share financial information with staff? Typically, it's because they don't want staff to know how much money they're making and consider that information to be very private. This leads to the kind of disenfranchisement that the first general manager experienced. In the second instance, the owner shared complete financial information without educating the general manager to the necessity of profits and how critical they are for the growth of the business. He also provided no incentive for the manager to create the profits and no reward when he did.
What should you share?
In our experience, your staff wants to know about the financial things in the organization that they can control. In almost every organization this revolves around your variable costs, those things that are directly caused by your sales. Typically, these are your cost of goods sold, direct labor, sales commissions, bank credit card processing fees, bad debts, any franchise fees, and any other costs that are directly resulting from a sale.
When these costs have been identified and understood, your staff can then calculate the single most important number that every owner and manager needs to know, their contribution margin percentage. When I owned my company, this is the number that my managers were bonused on, because it was the one they could actually have direct control over through their managerial expertise.
When contribution margin is divided into a dollar, we create their "magic number" that lets them know how much in additional sales they need for every dollar of increased fixed costs. When my managers learned this number, they became partners with me in creating profits in their units. They knew that if their contribution margin was 30 percent and they added a $1,500/month new fixed cost in the form of a lease payment, that new purchase (whatever it was) had to create $5,000 in new sales per month to be profitable. It helped us plan for profit, hire staff, buy assets, assess a wage increase, plan a price increase, avoid a price decrease, and promote upselling. It changed the culture of my company, and I believe it will change the culture of yours.
So how do you get there?
It requires the financial education of your staff to a level of financial acumen that gives them the ability to understand the financial structure of their unit and how they can affect it in a positive manner. Understanding their breakeven and contribution margin for their unit is critical to their ability to assist you in driving up profitability. That's what we do at Profit Soup. Our financial education programs enable your staff to measure their units' financial status, understand where the numbers come from, and begin improving them. We would be happy to help you get them there, and I promise, it will drive up the success of your entire network.
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