Employees need understand company’s (employer) financial statements

There are three key elements to any program where employer makes efforts to make his employees need understand company’s working particularly with regards to bottom line. First, management opens the company’s books and shares detailed financial and operating information with employees. If employees don’t know how the company makes money, how can they be expected to make the firm more successful? Second, employees need to be taught to understand the company’s financial statements. This means management must provide employees with a “basic course” in how to read and interpret income statements, balance sheets, and crash statements. And third, management needs to show employees how their work influences financial results. Showing employees the impact of their jobs on the bottom line makes financial statement analysis. This is called open book management.

Open book management seeks to get every employee to think and behave like an owner. It throws out the notion that bosses run things and employees do what they’re told. In the open-book approach, employees are given the information that historically was strictly kept within the management ranks.

Who is using the above? More than 3,500 organizations, including Springfield Remanufacturing Corp., Allstate Insurance, SRG Holdings, Amoco Canada, Rhino Foods and Sprint’s Government System division.

Why should it work? Access to detailed financial information and the ability to understand that information make employees think like owners. And this leads to them making decisions that are best for the organization, not just for them.

Most firms that have introduced open book management or OBM offer evidence that it has significantly helped the business. For instance, Springfield Remanufacturing was losing $61,000 on sales of $61 million. Management attributes much of the company’s current success – profits of $12million a year on sales of $160 million – to OBM. Similarly, Allstate’s Business Insurance Group used OBM to boost return-on-equity from 2.9% to 16.5% in just three years.

The owners of Optics 1 Inc., an optical engineering company in Southern California, with 23 employees and sales of less than $10 million a year implemented an OBM program. After a short time, the program was discontinued. One of the co-owners said that employees used the information against him. When we made a profit, they demanded bigger bonuses and new computers. When I used profits to finance a new product line, everybody said, “That’s nice, but what’s in it for me? ….” If employees misinterpret financial information, it’s more damaging than their not having access at all. Owners gave them general and administrative rates. Next thing was employees were backing out everyone’s salaries and asking owners “You’re paying that guy $86,000? I contribute more”.

Preceding case illustrates part of the downside to OBM is that employees may misuse or misinterpret the information they get against management. Another potential problem is the leaking of confidential information to competitors. In the hands of the competition, detailed information on the company’s operations and financial position may undermine a firm’s competitive advantage.

When OBM succeeds, two factors seem to exist. First, the organization or unit in which it’s implemented tends to be small. It’s a lot easier to introduce OBM in a small, start-up company than in a large, geographically dispersed company that has operated for years with closed books and little employee involvement. Second, there needs to be a mutually trusting relationship between management and workers. In organizational cultures in which management doesn’t trust employees to act selflessly or in which managers and accountants have been trained to keep information under lock and key, OBM isn’t likely to work. Nor will it succeed when employees believe any new change program is only likely to further manipulate or exploit them for management’s advantage.