Sunday, May 8, 2011

Employees Need to Understand Some Basics About Your Finances

Employees need some idea of your firm's fiscal health

May 5, 2011
By Jerry Osteryoung

“Information can tell us everything. It has all the answers. But they are answers to questions we have not asked, and which doubtless don't even arise.” ~Jean Baudrillard

A local business owner who is a distributor for a large manufacturer was considering asking his staff to help cut costs. He decided to survey his staff first, asking everyone three questions:
What percent of the selling price of goods or services do the owners get to keep?
What is the dollar amount the owners have invested in this company out of their own pocket?
By what percentage do you think the profits of this company grow every year?
When the entrepreneur compiled the results from these questions, he was floored. Like so many others, this entrepreneur understood very little about his staff's knowledge of the business. He assumed that they knew much more than they actually did.

In response to question one, several employees said the owner kept 100 percent of the sale price, and not one staff member said he kept less than 30 percent. Every one of his employees believed he got to keep 30 percent or more of the profit, and the average response was 50 percent.

Staff does not need to know the exact amount, but it is important they have some idea of the range of profits you are making. Ensuring your staff has a reasonable expectation is important for many reasons. In this case, it was going to be very difficult for this entrepreneur to convince his staff to help cut costs if they thought he was making 50 percent on every sale.

The entrepreneur showed his staff that the average public company only earned two percent in net profits last year — a shocking revelation for many. Most never imagined the number would be so low.

As for the second question, most of the staff greatly underestimated the amount the owner had invested in the business. Most answered that the owner had put in $100,000, but in reality he had contributed more than $1 million of his own money.

To correct this false impression, the owner simply told his employees how much of his own money he had invested. Again, the staff was floored. They had no idea.

On the question about profit growth, most of the staff answered that profits had been increasing by more than 20 percent each year. In reality, profits had been declining.

Through this exercise, employees gained a new understanding of the business and a more accurate idea of its financial situation. Now that those major misconceptions had been replaced with more realistic impressions, it was much easier to get the staff to buy in to cost-cutting measures.

Now go out and make sure your staff has a general idea about your profitability and the amount you have invested in the business. I am convinced that the more upfront you are about this, the harder your staff will work.

You can do this!

Jerry Osteryoung is the Director of Outreach of The Jim Moran Institute for Global Entrepreneurship in the College of Business at Florida State University; The Jim Moran Professor Emeritus of Entrepreneurship; and Professor Emeritus of Finance. He was the founding Executive Director of The Jim Moran Institute and served in that position from 1995 through 2008. His newest book “If You Have Employees, You Really Need This Book” is an bestseller. He can be reached by e-mail at All of Osteryoung's articles can be found in a searchable format at

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