Open Your Books to Profit

I wanted to post this here on my personal blog to see if anyone had any questions they wanted to submit. Here is the link to the article

Open Book Management

I hear people discuss open book management (OBM) and feel that business owners are absolutely too hesitant to dive into this. What is the fear of using OBM? Some reasons include not wanting employees to know their income, or not knowing how to use the information to build a team spirit, or that the owners don’t understand a financial statement.

In addressing the last point, I feel it is imperative that business owners understand their financials. You cannot earn a consistent profit without understanding how every movement affects the bottom line. Financials provide a strategic map that outlines where you have been, where you are, and where you are headed. In turn, OBM provides a way to use financial information to get your team focused on being profitable. This isn’t a “buy-in” per se’, it’s a necessity to developing a team that is focused on becoming a well-oiled machine.

I can review any financial information and in a matter of minutes know both what is functioning very well and what problems a business might experience. Financials, when set up properly, with the right chart of accounts, following a percentage of completion philosophy, and using an annual comparative, enable business owners to have the right information to make the right decisions.

Understanding the numbers will let you know what areas of your business need improvement. You might have a high sales volume, but if you don’t understand your profit margins, you might be under-selling projects without realizing it. Your company might be most efficient at building additions, but often accept bath and kitchen projects that may not obtain your required profit margins. Your financial statements might reveal that your overhead is too high.

By itemizing the entire general and administrative accounts, you will have a more systematic and analytical look at the proper numbers, which gives you the opportunity to streamline your operations. If you see each line item on a monthly basis, you’ll quickly see where you are  spending your money and be able to make decisions on what expenses are increasing or decreasing and why. You can ask yourself, “can I save money on my phone service?” or “can I afford another vehicle?’ or “what can I do to reduce my insurance?” When you look at the numbers systematically, every month, you become more analytical and savvy in how you spend money.

Once you understand your financials, you can share them with your employees and help them understand what the numbers on a report mean. Open book management can build a culture of success. Having an accurate financial can help the team analyze a situation more thoroughly and present the decision makers with accurate information to make an educated and better decision. If an employee requests a raise, you can use the time to share information with him including material rates on his projects, labor rates, and profit goals. That very same employee might not ask for a raise if they knew the business missed profit goals by 10% or that the projects the employee was responsible for didn’t meet the desired profit margins.

There are so many ways to involve the team and team build. In my upcoming blogs, I’m going to take an in-depth look at OBM and will include a series of many true life examples and scenarios and answer questions to ensure that OBM is part of your growth. Submit your questions about open book management to me at tim@remodelbuddy.com.