This article was originally published on entrepreneur.com
Approach transparency in the right way and you’ll only enhance your business’s profits and productivity.
We have all been conditioned to expect immediate access to information — except where company financials are concerned. A 2016 study by Robert Halffound that only 25 percent of privately held companies surveyed were sharing financial information with all of their employees.
That may sound like a lot — it’s an 18 percent increase from five years ago. But, given the benefits of transparency for both companies and workers, even more businesses should get on board with the trend. After all, sharing financial information can be a huge boon to the bottom line. It allows all team members to understand how they can positively impact the financial performance of the company.
When employees see the financial ramifications of their role and their work, those revelations minimize unintentional actions that undermine business goals; they may also boost creativity and productivity, which supports the business.
Not only is it good for profit margins, but disclosing financials can also lift employee morale. Decisions and information no longer appear to be the domain of leaders operating in isolation. Everyone in the company feels involved and knows that the pursuit of success is a group effort.
Overall, transparency goes a long way toward building a productive, high-performing business and culture. Here are some other benefits:
Financial transparency breeds new ideas.
A good company stands to get even better by disclosing financial information to its employees. Employees who feel that their employer is transparent are more likely to strive toward meeting its goals. My company Acceleration Partners experienced this when we started releasing our full financial report.
The call for transparency came about a few years ago when we sought to improve profitability. After walking the whole company through our financials, we asked employees to weigh in on how they thought we could make improvements. As soon as people saw the connection between the efficiency of their work and the company’s profit, they came up with a list of 20 ideas to improve both.
Not only did financial disclosure yield innovative ideas, but implementing those ideas also increased our margins. Today, we review financials monthly and give employees full access to our financial reports. Of course, there are some important caveats to think about first:
Important considerations before disclosing financials
Full transparency is the goal, but there are three essential steps companies should take to get there.
1. Instill financial literacy in your team. Sharing financial information does no good if employees aren’t trained to understand it. Many Americans have significant gaps in their financial knowledge, according to a FINRA Investor Education Foundation survey. When asked five basic questions about economics and finances, only 37 percent of U.S. survey participants could answer four or more questions correctly.
The Financial Education for Today’s Workforce: 2016 Survey Results, a recent report by the International Foundation of Employee Benefit Plans (IFEBP), showed that more and more employers are opting to provide their staff members with financial education to help them better manage money, improve their understanding of and satisfaction with current benefits and make better decisions about investments and retirement planning.
Before diving into the nitty-gritty of financial reports, educate your employees on the meaning of revenue, gross margin, contribution margin, operating margin and whatever other metrics you use to evaluate your company’s financial picture. Every business has its own nuances for different terms, and everyone needs to understand both the general and specific definitions used in your financial reports.
2. Set the record straight about cash. Many people — and even companies — don’t know the difference between profit and cash flow. This confusion is significant because cash often factors into layoffs and bankruptcies. A profitable, high-revenue growth company can quite easily be cash-flow negative, which can result in an inability to pay employees.
Be up-front about cash. Clarify the role it plays in the health of your company and what the current cash situation is. When presenting financials, also talk about the broader implications — how the present compares to goals for the month and the year and why the numbers are tracking the way they are.
At my company, a recent hire who had come from a high-growth company found this system especially comforting. She told us how her previous employer had hired her, along with many others, during a period of rapid expansion. Unfortunately, the company didn’t have the cash flow to maintain such a large workforce. The employees had no idea about their employer’s dire financial situation until layoffs started to happen.
Transparency is crucial in reassuring employees that your company is financially stable and in helping them anticipate significant changes.
3. Put yourself in your employees’ shoes. Every company will be different. At AP, if we have poor cash flow, it means we can’t pay everyone — and that’s scary. However, if I worked for a venture-backed dot-com with $25 million dollars in the bank from an investor, the cash flow metric wouldn’t really be relevant. So, while there are no specific metrics that employees in every company would want to know, they all want to understand how their employer’s finances could potentially affect them.
Drugmaker Mallinckrodt learned this lesson the hard way. The company is currently facing a lawsuit brought by one of its own employees who bought into the company’s stock purchase plan before learning that 60 percent of the revenue of Mallinckrodt’s major drug (Acthar) comes from Medicare and Medicaid.
The employee claimed that this lack of disclosure obscured the amount of risk tied up in Acthar’s revenues, leading him to make a less-than-informed investment.
No company wants to engage in such a legal battle with an employee, but beyond possibly damaging Mallinckrodt’s reputation internally and externally, the effects of withholding this information also likely affected the litigating employee’s performance at work — not to mention the morale of his teammates, who no doubt wondered about their company’s potential lack of transparency in other areas.
As the IFEBP report mentioned above showed, performance and productivity can take a hit when employees struggle to make sense of their own finances in relation to their company’s financials. The idea behind building financial literacy in employees is to help them stop stressing over their own debt, living and medical expenses, retirement savings and the cost of their kids’ education, and thereby, perform more consistently at a higher level.
It’s essential to provide the most impactful information to your employees. When you’re trying to determine which financial concerns will weigh most heavily on them, put yourself in their shoes. What do they care most about? Then put those issues at the top of your agenda.
Your employees have a stake in your company. As such, they should be briefed on financials. Disclosing this information benefits all team members and gives them a better sense of security. It also tends to compel them to want to work more productively. Approach transparency in the right way, and you will only enhance your business.