Why Financial Literacy Isn’t Complicated
The goal of broad-based financial and business literacy isn’t to build a bunch of accountants or economists. We want broad-based financial literacy to help people be better intrapreneurs and become conversant in some foundational basics. The stories below contain curated links with lessons varying in complexity to help build understanding. Like my CFO friend says – “I don’t want to get too accountant on’ya!” and great CFOs in open book companies help teach people who can then teach people the business of running the business.
This is intended to help everyone in a company understand how a company makes money, understands its cash flow needs, and generates profit. Once people understand the basics they can make better decisions, ask better questions, and provide informed insights that will help the business. We won’t go into accruals – well, unless you want to.
- The essential basics of three financial statements – very quick, just a little longer
Stories on making a daily impact with basic financial literacy
The math of a machinist
A person working in the maintenance department regularly orders parts for a certain machine. She learns that this part is purchased at $300 each. She experiments and finds out that she can fabricate the part of about $85. This includes the raw material, her time, and an applied 40% estimated labor burden (the cost of a company to have an employee – taxes, benefits, pension, etc.). These expenses are broadly called the cost of goods sold.
She knows from the monthly open book reporting that the company is looking for places to save money. By saving money, she will help the company, even if in a small way, save money or free up those dollars. She also knows that the company is taking a strategic pivot, making a significant investment in brand building, and a building marketing campaign to help drive more revenue, so by freeing up the expense for this part, she can help the marketing team and drive future revenue. She is committed to contributing to the integrated impact.
In her calculation, she also considers her opportunity costs. She will give up one hour per part or about 14 hours per year fabricating parts to meet the annual need. She must consider if the savings is worth reprioritizing her time away from her other tasks and projects. She weighs her options and decides to reprioritize her time and build the parts.
In an open book company – these decisions are made every day by each person. All employees are informed participants in the experience of running the business. Great ideas can come from everywhere, and there is no need for bureaucratic meetings or approval trees to make sensible decisions.
Paperweight
An office administrator notices a ton of paper left abandoned on the printer. It goes unclaimed and is just waste. She estimates 3 reams of paper are left sitting each month. An average ream of paper costs the company about $25. So, the company wastes about $900 per year on unclaimed printed paper (not to mention environmental impact). So, she wonders how much a salesperson has to sell to make up for that waste. In other words, how much revenue has to be generated to produce profit to pay for this unnecessary expense. She knows that there is only about $15 profit per unit sold (revenue – expenses), so a salesperson will have to sell 60 units to generate enough profit to cover the $900 of waste.
She creates a save our salespeople campaign where she builds awareness of waste and the unintended, indirect impact on her sales coworkers. Her campaign reduces waste to 1 ream of paper per month saving about $600 per year and creating new, better printer use habits. She is also able to bring a little levity to the day with her campaign. She chooses to use $100 of the savings to celebrate the group-effort and uses the time to launch to other savings games in other areas.
Again – no additional meetings, just a concerned person who cares about the company. No management dictates. No bureaucracy. Just meaningful action.
Operators and income
A team of operators are frustrated with some leadership decisions that require creating a new product. This new product will require some of their machines to be down longer so the team can adapt the work-flow to the new product. It will make the team less efficient. Their primary team success measures are oriented to efficiency and minimizing machine downtime.
However, the team learns more about these new products. The new product is estimated to create less revenue but at a higher margin. After the basic business math is applied, even after some production inefficiencies are considered, the new product will create more profit for the company. A broader, more customer-focused product portfolio also brings the opportunity to build more long-term value. With this more open book, whole company perspective, the team is bought in. Also, this team does not have a bonus or incentive system based on their efficiency. Their incentive is a whole-company gain sharing incentive, again, supporting the all-in-it-together support regardless if one team must slow down.
Lesson learned: scorecards need to be holistically built to represent what will make the company most successful and effective, not necessarily always making the team efficient.
“Revenue without profit is just more work” – Jack Stack
Leading is still leading!
When people understand the fundamentals, leadership can speak to and gain employee insights on the strategic choices a company is making. We all know business is more complicated than some of the examples above. The marketplace is ever changing. Risk needs to be taken and decisive action made. Leaders of conscious or open book companies cherish the opportunities to build the business case for strategic decisions and can point out why certain decisions can be advantageous, but potentially risky. OBM isn’t a magic pill. Open, trust centered, wise, authentic leadership is always key to making a company great. (see also – servant leader checklist, servant leadership a practitioners perspective, and an amazing leadership competency list)
The BIG caveat – social enterprises will often choose to operate at a lower profit margin. They may choose to pay higher wages and offer great benefits. They may choose to order supplies and materials that are higher cost because of principles of environmental sustainability and fair labor standards. If a company is choosing a triple bottom line of profit, people, and planet they are making conscious decisions of powering the financial engine to make an impact beyond mere profit. In these cases, financial literacy is necessary and powerful! Benchmarking with other companies who focus on maximizing profit compared to the conscious company who designs their profit picture with intention and attention is a powerful story on positive social impact.
The conscious company chooses a more holistic success scorecard that can transcend the typical, but also chooses to incorporate shrewd business lessons to build a company that is successful in its marketplace. A balanced scorecard should be customized based on a company’s purpose and mission. Some may include the people and planet perspective to aid in a broader perspective beyond financial.
If the company is employee-owned, the employees are the shareholder who values appreciation and dividends, the employee who values income and benefits, and the corporate citizen steward who lives the noble values. How a company chooses to power up the financial engine and invest the proceeds is part of its company DNA and how the employee-stockholder stewardship models.