I recently saw a social media post where a disgruntled employee outlined a saga that occurred between him and his former company. It could be shared as a case study in how both employers and employees can act in ways that degrade their relationship. At the end, the employee concludes that he was “tired of making profit for the CEO”.
I sometimes see owners attempt to engage their employees by sharing the importance of their work and how it impacts the company profitability. Variations of this theme occur when a company has a good year and the owner tells the employees “we had a very profitable year!”. The other variation is when owners share that, “the company is not profitable enough”.
I’m a huge fan of sharing information with employees. They need to know why they do what they do, how it impacts the company, and how the company success impacts them. However, simply sharing that “we need to make more profit” does not accomplish these goals. Here are a few reasons why.
Reason #1: Most People Don’t Understand What Profit Is
We are all supposed to know some basic financials, but the truth is that many people are financially illiterate. This is a dirty secret in many business circles because it is too embarrassing to ask questions or admit a gap in knowledge, but I can tell you that in my experience, too many people (including owners, executives, managers, supervisors, and employees) don’t understand basic financial statements. Many don’t know the difference between revenue and profit and too many owners focus too much attention on revenue, rather than on profit.
Revenue is the money that comes into an organization. Profit is what is left over after the company pays its expenses. It’s fun to talk about revenue and all of the money that comes in, but it’s really profit that makes a company healthy.
Reason #2: Most People Don’t Understand Where Profit Goes
If you ask the average employee, they will tell you that profit goes into the pocket of the owner of the company. They will also tell you that the average company makes 30 to 40 cents for every dollar of revenue. The truth is very different. While some owners do quite well, owners are the last to get paid in a business and many don’t make a lot of money. In fact, some owners have to regularly put money into a business to keep it going. Plus the margins are typically tighter than employees know. The average business in the US makes 7 to 8 cents for every dollar of revenue.
What happens with profit depends on the savviness of the owner. Owners are humans and are subject to the same flaws in handling money that we all have. Some owners do pocket profit and spend it on personal items. The problem is that for many small businesses, profit tends to fluctuate up and down. For example, during the pandemic, many profitable businesses suddenly found themselves very unprofitable. Owners who spend their profit on themselves found that they didn’t have cash needed to run their business. Savvy business owners use profits to build up cash reserves for a rainy day, and then invest their profit back into their company to support growth. The best owners invest their profit back into their people in the form of compensation, benefits, tools, and perks.
Reason #3: Most People Don’t Know How They Can Impact Profit
The focus on revenue also creates the impression for employees that unless you are on the sales team, you really can’t impact profitability. This is absolutely not true. Every employee impacts the profitability of the organization either directly or indirectly. Some impact the quality of the product or service allowing the company to sell more. Some impact revenue directly. Others impact expenses.
It’s important to teach employees how they impact the business and show them what that impact really is. A publisher we work with was very focused on driving revenue. We did a presentation for their staff on how they all impact expenses and how expenses heavily influence culture. We showed that when the sales team sells $1000 worth of ads at a 10% margin, they have contributed $100 to the bottom line. However, when the edit team saves $1000 from their freelance budget, this contributes all $1000 to the bottom line. This client found a way to reduce their freelance budget by $15,000 per year. To many business owners, this sounds nice, but they don’t get excited. However, we pointed out that at a 10% margin, this is the equivalent of selling an additional $150,000 in ads! That is something to get excited about.
The Great Game of Business
The Great Game of Business is a methodology created by Jack Stack and the Springfield Remanufacturing Company. This methodology involves teaching employees the common language of business which are the financials. When employees understand how a business works, how they can impact it, and then how that impacts them, it creates what the Game calls a “line of sight” and employees start thinking differently. They start acting like owners and make different decisions on a day by day basis.
People Centric has partnered with the Great Game of Business organization (a subsidiary of Springfield Remanufacturing Company) and to add this methodology to our own processes designed to improve organizational culture.
The punchline is that if you want more engagement from your people, you should start by educating them (and yourself) about the financial drivers of your business.