642: Financial Literacy For Employees: Helping Employees Understand That A Dollar Is NOT a Dollar

Business owners are in a constant state of wondering to what depth they “share the numbers” with employees regarding revenues, budgets, profit and loss statement, and/or balance sheets. A client relayed a story of their administrator going to the mail and coming back with a check for $38,000 to which the administrator looked straight at the owner and said, “Wow, your going to be able to do a lot with $38,000.” Ugghhhh. Business ownership is challenging enough and demands continual responsibility around the health and well-being of employees, budgets, products and services, marketing, sales, customers, and clients.  It is a game that does not stop so how can you relay financial information in a way where employees can begin to understand and positions each employee to see how their work has direct impact on both the top and bottom financial lines of the business? First, you must have clarity on your numbers.  Owners that “wing it” with the finances will scale down their confusion.   Every business owner must carry a past/present/future perspective regarding the business finances. The profit and loss statement and balance sheet offer a rear (past) facing perspective of a business finance.  It is a static snapshot of what has been in the past (and in some cases, what is today). For the present look at finances, each business should have sub-divided bank accounts.   Think of it as a Dave Ramsey-style cash-envelope system, but in digital format for the business.  When a dollar enters the business (receivables), that dollar ought to be sub-divided into various homes (bank accounts) for which the portion of that dollar is earmarked.  A portion to profit, a portion to cost of goods sold, a portion to operating expense, a portion to taxes, and so on.   The definitive work on the subdivision of bank accounts has been whimsically written by Mike Michalowicz in his important (and fun) book Profit First.  Supporting the sub-divided accounts should be a weekly tracking sheet that we call the Level Two Dashboard (Level One being the sub-divided accounts themselves when pulled up on your bank’s portal). The Level Two Dashboard is simply a weekly snapshot of your sub-divided bank accounts for that week so we can watch a historical flow of cash (that’s the REAL cash flow we like to see).  We can also add line items for receivables, payables, debts, etc. to help us see what actual cash the business has access to today, and historically has had access to. The future look of our business finance will be spelled out in simple budgets and pro formas.  The budgets give us a general idea of how much we have allotted for the various systems of the business, and the pro formas educate us on what would happen if we took on a certain decision.   When you have the confidence as a business owner of knowing that you are taking a three-pronged, past/present/future snapshot of the business then it is time to do some based financial literacy for your team. There are three principles that would be helpful to communicate along with a fun exercise. The first of these three principles are  A dollar is not a dollar. When a dollar comes in the top of the revenue funnel, to our earlier example of the administrator’s dismay…not all of that goes to the owner…in fact the majority of that income goes elsewhere. It leads to principles two and three…  A dollar out is always MORE than a dollar A dollar in is always LESS than a dollar  As for principle two,  a dollar out is always MORE than a dollar, I went to a pizza place this weekend with my family.  The pizza was a published price of $20 but for some reason, I paid almost $22. Why?    A dollar out is always MORE than a dollar. With taxes, fees, and other surprising elements, the price that is published is rarely the price you pay… a dollar out is always MORE than a dollar. As for principle three, a dollar in is always LESS than a dollar, has there ever been a receivable that has come into your business where you have been able to retain 100% of that receivable for yourself? Not even an all-cash business can say that.  Even an illicit, all-cash business must pay overhead, employees, cost of goods, etc. A dollar in is always LESS than a dollar. There is a fun exercise that we have shared with our clients and their teams a number of times where you take a roll of 100 pennies and a solo cup. Dump the pennies out onto the table and start working through the percentages of your profit and loss statement in general terms (or you can use an example company from a similar industry). 35% goes to cost of goods?  Put 35 pennies in the solo cup. 26% goes to employee payroll?  Put 26 pennies in the solo cup. Do that until you're left with your remaining pennies and then remind the team that we still have not accounted for taxes or mistakes and other overages.  So even if the profit and loss shows a profit, that number is rarely the cash that is actually available to the business. It is not reasonable to assume your employees understand the basics of business finance.  When they hear that your business generated $5,000,000 in revenue last year, there is an assumption that you are a millionaire, when in reality you spent the majority of that money to run the business.   A dollar is not a dollar, and employees need to hear that message.