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Ken Keller: The impact of poor financial literacy

Brain food for business owners

Posted: October 19, 2010 8:09 p.m.
Updated: October 20, 2010 4:55 a.m.
 

Every day the owner of a business is focused on finding answers to a single question: What can I do to improve the financial health of this company? 

The financial health of every company is reflected in the profit and loss or income statement, cash flow and balance sheet.
Every employee impacts these documents. The problem for the owner is that most employees do not understand how they effect profit, cash flow, assets or liabilities.

Does it matter to the employee responsible for calling on the status of late invoices if calls are made on a Monday or a week from Monday? Does it concern the shipping department if paperwork doesn’t get to billing for a couple of days?
There is often no incentive for anyone to work harder or faster than is necessary even with negative company financial consequences. 

The owner can perform a simple check of four questions that will bear this out.

The owner should ask what an employee can do to improve the profitability of the company that provides them a paycheck and wait for a response. The owner will likely hear “I’m not sure.”

The owner should ask what an employee can do to improve the cash flow of the company they work for and wait for a reply. The answer is likely going to be, “I don’t know.”

When an employee is asked the third question, “How can you help improve the balance sheet for the company?” the owner is probably going to hear, “I don’t know what that is.”

If an employee were to be asked by the owner, “A check arrived at the office today from a client in the amount of $5,000: How much of that goes to me?” the answer is more than likely going to be “all of it.”

Who is at fault for this lack of financial literacy? Both owner and employee are responsible.

Many owners are disinclined to share any financial information with employees. Yet, these same owners expect the employees to act as owners.

Employees are concerned about the financial health of the company to the extent that the company provides them with a paycheck, benefits, increases in pay and security that their job will continue. Many employees don’t think beyond those limited terms.

What can be done to close the gap in thinking?

The first thing is that every owner needs to be clear about why every employee is on the payroll. Intuitively, owners know why a position exists and what people are supposed to be doing to help the company. That isn’t enough. 

What if the owner were to sit down and take the time to think through the specific reasons why an employee is on the payroll and then take the time to share that information with each employee? Getting specific about how an employee can maintain and improve the financial health of the company makes sense for both owner and employee.

Second, what employees do every day at work must be tied back to the financial health of the company. If employees don’t understand this, they will do what they have always done, whether it is good or bad. That means they will continue to work in their own self-interest. This will breed resentment and anger from the owner.

An owner interested in increasing the level of financial engagement of employees must take the time to prepare and share how what each employee does ties to specific lines on the income statement, cash flow and balance sheet. Note that this does not mean that the financial statements need to be revealed. It means providing insight for the employees as to how they can help the company.

Third, the employer needs to add specific information to each job description that includes what the position does that improves the financial health of the company. By doing this, employees will be on notice that their employer has people on the payroll for a financial reason, not a social one. This action cannot be limited to just people in sales.

Fourth, many employees will not understand the “why” behind these steps unless they profit from the process. An owner would be wise to create and launch a financial improvement-performance program for employees. When the financial health of the company improves, the employees must share in the positive results. Any such plan must be set up based on objective criteria, and payments made frequently enough to have ongoing and sustaining impact.

If employees are truly a solid asset of a company, the asset must be educated as to how to become more valuable to the company. That responsibility starts with the owner making the decision to change the thought process that an employee is not an expense but a key part of the process to improve the financial health of the company.

Ken Keller is president of Renaissance Executive Forums, helping top executives make better decisions through informed peer perspective, resulting in better top and bottom-line results. He can be reached at (661) 295-6892 or  KKeller@ExecutiveForums.com. Mr. Keller’s column reflects his own views and not necessarily those of The Signal.

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