The Sorry State of Financial Savvy Today

While reading a recent issue of The Harvard Business Review, I came across an article titled “Are Your People Financially Literate?” by Karen Berman and Joe Knight (October 2009, page 28). The title woke my curiosity since I am an advocate of business people knowing the financial ropes as well as they can. The article was stunning. The research at their web site (http://www.financedog.com/blogs/18) showed that only 38% of those they have tested made a passing score. (Even I did poorly on the six-question sample test the site offers as a teaser to buy their services.)

In the 1990’s, I became interested in a concept called open-book management and had the opportunity to attend a seminar at a company that was a pioneer in this field, Springfield Remanufacturing Company, located in Springfield, Mo. The plant manager and CEO, Jack Stack, had written a book called The Great Game of Business which described their approach to beefing up the financial literacy of their employees, and I decided I had to see if this stuff was really true or just hype.

Springfield Remanufacturing (you can check their web site at http://www.srcreman.com/homepage.htm) is in the business of remanufacturing diesel engines for large trucks and tractors and do about the best job of it of anyone in the country. I don’t know if they still offer the monthly “open book management” seminars like they did in the 1990’s, so if you want to check them out, you may have to call them.

My experience over the 3-day session I attended was amazing. Here you have a manufacturing plant that employs several hundred people, most with only a high-school education, and everyone on the shop floor knows the key numbers every week! Each week, the department managers gather at the central offices for a half-day recap of the business for the past week. Each manager divulges to the others the numbers his department reached (not just production numbers, either— we’re talking financial numbers as well!). If he or she is not on track to meet the mutually-agreed upon business plan the team put together at the end of the prior year, they had better have an explanation, because any person in the meeting (not just Mr. Stack) can grill a speaker if the data is not on track. (And man, did they!) After the meeting, the department managers take the results of the meeting back to their departments and hold mini-meetings where they share not only the department’s financial performance but the company’s as a whole.

So why do they do this? To build a more profitable company. As Jack Stack writes in his book, “When you appeal to the highest level of thinking you get the highest level of performance.” Gee, such a nice, warm and fuzzy platitude, the kind of thing Pollyanna might say. But is it real?

My experience blew me away! As part of the Great Game of Business Seminar, you are allowed to tour the factory floor and talk to any employee you wish. Any question is legitimate. I paused at one station where a 30-something woman was putting the final touches on diesel fuel injector nozzles. A small part, a pittance as they might say in England. I asked her, “What do these injectors cost?  Do you know?” (Thinking I had her!)

She walked over to a shelf near her station and pulled down a 3-inch thick 3-ring binder. She turned to me as she opened it and said, “What week?”

Surprised, I said, “Oh, any week. You pick.”

Then she said, “Do you want to know our cost, the cost to the reseller, the cost to the end user, or the cost of the raw materials? Shall I include burden too?”  I just shook my head and chuckled, “Never mind! You know this like the back of your hand, don’t you?” She replied proudly with a smile, “That’s my job, mister!”

Major decisions about capital outlays are not made by senior management— they are approved by management, but not planned or made by management. That is the job of the floor people.

Case in point: employees are taught to watch the balance sheet like a CSI studies a crime scene. One year, the peoplein the shipping department came to management with a request for a new super-duty fork lift truck—a beast that could handle engines that weighed thousands of pounds. They said the ones they had were not big enough to handle the largest engines by themselves—that they had to rig two trucks together to move the biggest stuff in a ballet that almost defied choreography. Management replied, “Have you run the numbers yet?” They replied, “No.” Management said, “Well, do so and bring us back what you find out.”

A week later, the shipping department team came back to the weekly management meeting with the forecasts, projections, and what-if scenarios all worked out. It turned out that the move would put a serious ding in plant equity for a while (and since the employees get a piece of the equity pie, that is serious business!), but in the long haul, it would increase productivity more than enough to eventually offset the investment. As is the case with large outlays like this, the matter was brought to the factory floor for a vote. Employees looked the situation over carefully, weighing their loss of equity (and hit to their year-end bonus checks)  for the long-term gains in productivity— and voted to buy the new truck. Senior management then authorized the purchase.

Now compare that to the typical HVAC company, where often not even the owners know what is going on financially. How often do they get their financial statements? And when? If they don’t get them monthly and by the tenth of the month prox, they are in a fog. And they need to get three reports (income statement, balance sheet, and cash flow statement). And they need to go over them line by line with a CSI’s UV light and look for any clues of fiscal anemia and take countermeasures.

And let alone the crazy and burn-me-at-the-stake thought of the employees knowing the monthly numbers! Heresy!

Yet let me ask you a question: if you are an owner of an HVAC business, you probably have found out by now that these things are a whole lot more trouble than raising babies. Babies just wake you up at night sometimes and crap on you sometimes, but a business can keep you up all night and bury you in crap. You probably did not bargain for all this, did you? So what if your former employer (you know, the one who inspired you to go off on your own and start your own gig) had shared with you and the rest of his employees the monthly numbers and taught you what they meant? What if they had showed you how your contribution (or lack of it) impacted the numbers (and not just the bottom line— the equity too)?

If you had seen those numbers then, would you have started your own shop later? Maybe. Maybe not.

I’m not saying you need to hand out your normal income statement at a monthly meeting— you can condense it down a lot (instead of showing  how much Mary at the front desk makes, just lump her compensation in with all the other office staff and show a line “Office Wages”) and make it simpler to read. But you do need to share the numbers with your people and explain to them what they mean and how their activities affect those numbers.

“But what if we’re having a slump?” someone will say.  “Won’t that scare them?”

Maybe. And perhaps it should. But it should also show them that slumps are normal and that by working together, they can be survived. And they can learn that their daily activities really do impact the company’s finances, maybe more than they thought.

And if you give them a steak in the outcome (I used “steak” on purpose rather than the normal “stake”), they might amaze you!

I will be adding a new departmentalized income statement worksheet tool to The Shop area soon. It includes an option to print a simple 1-page income statement for use in employee meetings. Check in later to see if it is posted yet and get a copy for your shop.

NOTE: For other great insights on open-book management, read John Case’s two books, Open-Book Management and The Open-Book Experience. To that list I would add Charles Coonradt’s The Game of Work.