Running a successful – and profitable – valuation practice is more than just putting out…
Ellen Warden, SPHR
WorkPlace Synergy, LLC
We all make judgments – about people; other BV practices – every day, based on little snippets of information. There’s a good chance those judgments are wrong, or at least thinly based. Still, the judgment often sticks.
A recurring question I get asked by BV practice owners, particularly at bonus time, is “how much financial information should we share with the employees?” Employees at publicly traded companies get a detailed look at their company’s financial performance when their employers release financial results each quarter, but staff at privately held firms don’t always get information that lets them assess how the business is faring.
Historically, the owners of most privately held firms have kept their financial information close to their vest to protect their privacy. They are concerned about open-book pitfalls, such as employees using their newfound knowledge against the owners. Employees may become dissatisfied with their remuneration packages, wondering how a firm generating considerable business can justify paying them so little. If salary details are disclosed as part of an open-book approach, this can fuel yet more internal consternation.
When employees are working in a vacuum, they can’t see the financial “big picture,” and decisions firm leaders make may seem ill-advised or unfair or simply inexplicable.
But if it’s done correctly, financial transparency can yield great results, by connecting employees to the “why.” They become more supportive when they better understand why certain decisions are made. Educating employees on your practice’s financials can create a sense of empowerment and ownership. And that understanding propels them to act – to increase performance resulting in improved retention as they view their role as important and meaningful to the firm.
Here are 5 tips for sharing selected financial results:
- Think big picture. Generalized financial information should be sufficient. Present summary information and don’t offer too much detail. Collapse the line items to major categories. Share key metrics using tables, graphs and charts to illustrate major points.
- Never share information on individual payroll and benefits. It’s just not prudent to let everyone have this information. When you do share financial performance metrics, make sure data on payroll and benefits are concealed or presented in a format that prevents reverse-engineering to discern the details. Consolidate the accounts to keep the information confidential.
- Educate when you share. Make sure your employees know what the numbers mean. For example: Telling someone you have a net profit of 10% doesn’t mean anything unless they know the target net profit is 15%. To counteract employee misperception that a substantial portion of each sale is pure profit to the business, highlight the difference between gross and net margins, identify significant overhead and expenses and explain that you must set aside funds to meet tax liabilities and future investment in the business.
- Tell the story behind the numbers: While it’s important to share some of the core financial information with employees, it’s far more useful to share the story behind the numbers – What happened to the key metrics? What drove the results? What does it mean to the business/strategy? Compare the numbers to previous years and put them in context to where you want to go. What does the team need to do as a result? More importantly, show employees how their daily work contributes to practice-wide growth.
- Foster an ownership mentality. When employees are aware of the financial metrics of the business, it becomes much easier to explain your decisions. Solicit employee opinions. If you aren’t hitting your financial targets, ask your employees for their opinions on how to solve the problem. Encourage staff to adjust their priorities given the company’s overall business situation. Invite their input on process improvements, cost-cutting and new revenue sources. You’re doing your business and employees a disservice if you aren’t giving them an opportunity to help.
Are financial goals a part of your key performance indicators? Transparency with the numbers can help you motivate employees and get them thinking like business owners. The trick is sharing enough information to allow your employees to understand the decision making processes, but not so much that you overwhelm or give away sensitive information.
Ellen Warden consults with business valuation practices on a variety of human resources issues. Read more at WorkPlace Synergy.