Does Your Staff Understand Profitability?

Does Your Staff Understand Profitability?

It is common knowledge that if you as a business owner do not understand how to generate a profit, it is very likely that you won’t. Moreover, once you understand the metrics involved in architecting your business to be profitable, you are more likely to recognize a profit. I have had the opportunity to work with thousands of business owners, some of which were quite clear about their quest for profit while others were unclear on how to know if what was on their Income Statement was anywhere near accurate. I would say that the proportion that know and those that don’t were about 60/40 as a percentage. A sad commentary, I agree. Those that understood their company’s financial position had another commonality that I found interesting. Some believed that their management and staff should NOT know the profit picture while the others wanted to make sure that all employees that worked within the company should absolutely know.

I am not nor do I pretend to be a psychologist but the reasons for business owners having a mixed feeling about who should know if the company is profitable are mixed. To repeat a previous comment, those that understand their own profitability tend to be profitable, and those that don’t usually are not. I suspect that most owners feel company financial information should be confidential with the thinking that if the staff knew, they’d ask for more of it in the form of greater bonuses or higher pay. Pedestrian thinking and at very least not very motivational. Nevertheless, understanding the actual company goal is something paramount to achieving it. So, if the goal is to make money, what is the harm in sharing that with each department head (at least) so that they can assist in the arduous task of achieving it?

Most of the key employees that I have interviewed in the companies that I have surveyed recognize that making money is key to being successful. How much, they’re not sure. How can they directly do that, they’re also not sure. Most people respond that they have been told that their department is either a “profit center” or a “cost center”. This happens to be a very common understanding of the fundamentals of the business. Some departments make money while others, like administration, operations or Human Resources are cost centers. They don’t really generate revenue for the company whereas sales and marketing get the product or service in the hands of the consumer. They satisfy their position by saying something like, “Without us you wouldn’t have the product or structure to get the product/service TO the consumer!” Not to split hairs here but there is a uniform view of the company’s profitability that can be touted by all departments.

I have advised many business owners (and staff for that matter) of a simple policy that satisfies all departments. A company’s profit is determined by two things: [a] accumulating revenue, and [b] controlling expenses. I would argue that one is not more important to a company than the other. What is profit? Making more than you spend or spending less than you make. Sounds juvenile but that’s the simplicity of it. It is necessary for any company to recognize their market, who is buying their product, what are the consumer’s options (competition) and market to them as effectively as you feasibly can thus generating sales. I guess you’d call that a “profit center”. So, what about operations, administration and Human Resources? In my mind they are charged with an equal responsibility to drive profit and that is to control expenses. If they don’t do that, doesn’t matter how much is sold. Refer to the premise. Let me elaborate.

I was speaking with a COO of a manufacturer some time ago. This astute operations chief was always on the look-out for a simpler, easier, more cost-efficient way to manufacture and manage operations of their product. At one point she came up with a means to produce the product with a 22% savings over previous means. Is this significant? Of course, and even more to the point, she knew that the overall savings would be 22% less expensive than before which immediately translates to profit because she KNEW they were profitable previously. How about the Human Resources Director who was able to navigate through an employee dispute that could have easily elevated if she had not taken the proper steps and used the appropriate language to solve the issue. In doing so, she saved the company conceivably hundreds of thousands of dollars by avoiding a protracted legal battle. Likely the negotiated solution salvaged employees such that the company didn’t become embroiled in a legal battle. That’s a considerable amount of money saved.

Let’s circle back to the original premise of this article. Does your staff understand profitability? In my example of the COO, if she didn’t understand it, would she have gone the extra mile to save the company money? More importantly, could she have? That goes for all staff at all levels. I’ve said countless times over the years that if you can’t measure it, you can’t manage it. If you can recognize the relationship between the metrics of your existing function within the company and its relationship to profitability (it’s called a budget by the way), you CAN impact profit by either adding to the revenue OR saving the costs by which you produce it. A business owner who chooses to keep the balance between sales and expenses to himself is doing so at his own peril. Seems to be “old school” thinking if you ask me.

Yes, on some level, you should share your company’s financial picture to (at very least) key people (department heads, etc.) but also ensure that all others under their supervision can draw a line to how their work impacts the success (profit) of the company. Engaging your employees in a proactive means to improve the company can be achieved by sharing the vision, the goals AND the metrics to do so. My father told me years ago, the more informed you are the more valuable you are to the company. It is incumbent upon the owner of the business to empower his employees with the information that they need to be as successful as they can be to make the company more successful. And yes, profitability is a key measure of the success of the business. Having seen many unusual dynamics inside many different companies, trust me when I say watching and acting upon the means to profitability is an “all hands on deck” proposition.

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