Lean Thinking

25 July 2017

Open Financial Figures

Written by  Published in Agile
Rate this item
(0 votes)

It's bonus time here at work right now so everyone (well, all the permies anyway) is excited about finances all of a sudden. The corridors are abuzz with talk about last year's performance, our EBIT, EBITDA, ROI, earnings, operating costs and of course the most important question of all - "what does all this mean for my bonus this year?". Anticipation builds as finance gets ready to release the all-important set of yearly numbers.

The company's financial results are really important and everyone should engage with them. After all, that's really why we are all here (even us contractors) - to make the company successful. Engaging with the financials is great. The problem here is that people engage for about a week around bonus time, then once that's done and dusted, they go back to focusing on their own individual KPIs and ignore the financials for the rest of the year. That's not what we want. We want people to focus on the financials all the time. So how do we do that?

Firstly though, why connect employees with the financials in the first place? Because it gives context to decisions that are being made. When management announces yet another round of cost cutting, the usual result is grumbling. If employees are engaged with the financials and the financials show that costs are up and profits are down, it's much easier to accept the inconvenience associated with cost cutting. And who knows? If they are really engaged, maybe they will see the increase in costs and start saving money without having to be told to. Maybe they will see that profits in one area are down and suggest new ways to increase them, or come up with ideas to redirect investment to more profitable areas. Maybe you will end up with 2000 people who care deeply about the company's performance and try to maximise it, instead of the 20 people you probably have now.

OK... Now back to the "how" part. How do we get people engaged? For a start, let's forget all this finance getting ready to announce the numbers stuff. The financial figures for the company should be available to all. In fact they probably are, if you know where to look. There will be reams of financial information floating around the company for people that care about such things (generally senior execs and finance folks), it's just that it's in a format that's not easily digestible and it's probably hidden in some obscure reporting system. Quite often financial information is treated as being, if not actually secret, certainly something the employees are discouraged from accessing. The feeling seems to be that the financials should be left to the management and employees should concentrate on their own KPIs.

That needs to change. We need to stop treating financial information like some sort of employee kryptonite and start treating it like information that can empower and motivate everyone in the organisation. The finance folks need to produce an easily digested financial summary and put it somewhere really obvious and easily accessible. Break it down by business unit so people can see where the work they do contributes to the overall figures. They need to do this every month. Actually, every week would be better but every month is a good starting point.

Second, people need to learn how to read the financials and make sense of them. Part of the mandatory induction training, alongside the health and safety and the "don't plug strange thumb drives into your laptop" modules there needs to be a "how to understand the financial statements" module. This sort of thing tends to be really, really dry but it doesn't have to be. There are plenty of ways to liven this up a little and not have your new employees falling asleep at their desks on day one.

So now we have people who have the information they need, and the knowledge to understand it. What we need now is a reason for them to care. That's where their KPIs come in. Connect every employee's KPIs to the financial performance of the company. They are already, you say? No they aren't. Not directly. They may connect in some abstract way - their KPI to drive more new customers should in theory lead to more profit but it doesn't actually have to. What if they decide to meet their KPI by offering free memberships, or heavy discounting, or giveaways? Lots of new customers, not necessarily lots of profit. In fact, if the cost of acquisition is too high, more customers can hurt profits.

Will never happen? It happens all the time. I have seen plenty of teams do this. They know they are hurting long term profitability but don't care because their KPI is new customers. As Demming said -

"People with targets and jobs dependent upon meeting them will probably meet the targets - even if they have to destroy the enterprise to do it. "

It's not just new customers, it's things like reducing stock levels (lower inventory costs) but at the expense of being able to actually ship product to customers in a reasonable time. It's offshoring to get a lower hourly rate at the expense of quality and ability to deliver. There are probably dozens of examples in your organisation right now, where people are working really hard to achieve KPIs in a way that will actively harm your financial performance.

So let's connect people directly to the financials, not indirectly. So instead of giving that team a target of X new customers, give them a target of X profit from new customers. Or Y revenue growth. Or some other target that makes them see the full picture rather than just focusing on one part of it.

So now we have people with information, people with the means to understand that information and with a reason to care about that information and use it in their day to day decision making. What happens now? Well at worst you have everyone in your company who now understands a bit more why some management decisions are being made and has a better appreciation of the challenges management is trying to address. At best you now have everyone in your organisation actively working along with the executives to maximise financial performance.

Leave a comment

We reserve the right to modify or remove comments that we deem to be offensive.

Make sure you enter the (*) required information where indicated. HTML code is not allowed.

You need to complete the Captcha in order to submit, but sometimes it doesn't load properly. You will need to refresh the page until it does and unfortunately that will clear anything that you have already entered. If you've already written a comment, please copy it first, then paste it into the comment field when the Captcha has loaded correctly.

Calendar

« August 2017 »
Mon Tue Wed Thu Fri Sat Sun
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31