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Where do the company dollars go?

Employees know what the company normally charges customers. For example, in the service department the street labor rate is often posted, in accordance with local ordinances. Employees also know what’s being charged for parts, shop materials, environmental fees and the like. And they certainly know that their pay is only a fraction of all that.

While most employees know the difference between the customer’s invoice and their paychecks isn’t all profit for the owner, they most likely think the profits are considerably higher than they really are.

Should employees be informed of what the real net profit is? The answer is yes, according to Donna Renn, who wrote “Open-Book Management 101” in Inc. magazine.
She suggests treating employees to a demonstration of the company’s expenses, visually illustrated as a portion of a $100 order.

Start by pinning $100 in cash to the bulletin board. The presenter begins by identifying the most obvious expenses — the cost of goods and labor, including any benefits, unemployment, workers comp, etc. — and removes bills from the board representing those percentages of the $100. Then the employees are asked start participating by identifying more expenses. They’ll likely name things like rent, utilities, advertising, shop equipment, and business insurance, among others. With each expense they name, the appropriate bills representing that portion of expenses are removed from the board.

When the employees run out of ideas, the presenter takes over, identifying any operating or fixed expenses the employees likely never think about, such as debt service, property and income taxes, licenses and fees, capital maintenance, training and education, and so on. At the end, there will be very few, if any, bills still on the board, and that should give employees the first realistic view they’ve ever had.

According to Renn, in businesses where this was done, morale was improved because employees had a true insight into the company’s expenses. Moreover, it both dramatized and challenged them to look for ways to further reduce expenses.

The overriding objective of such an exercise is to help employees understand how lean a company is really running. In addition, it graphically illustrates how difficult it is to stay competitive and, for that matter, how tough it is to stay in business and provide jobs in these tough times. Employees need to understand where the company’s dollars go.

Comments

10 comments on “Where do the company dollars go?

  1. Noel Osborne

    Norm

    Great points. I have advocated for sometime that our employees need to better understand that our income does not flow directly to the owners wallet. In our symposiums which we presented in the past we suggested that it is very easy to show employees how business works by using the illustration of a wagon load of apples that Johny is selling on the street corner. He sells the load for $100.00 but has a Cost of Sales of $80.00 and $10.00 in expenses such as permits and liscenses leaving a profit of $10.00. We suggest that the boat dealership is no different than the wagon load of apples. They are able to draw the parallel between the two. Sounds a little corner but has always been effective.
    If we want our employees to help us return to profitability then we need to better educate them on what business is all about and how they specifically contribute to the bottom line through improved efficiencies, etc.

  2. Gordy McKelvey

    Ms. Renn is dead on the mark here. Employees need this type of information not only to be more informed on how the company is managed but help to eliminate any misconceptions as to the attitude of “the boss is making all the money and we’re in here working for peanuts”. However Ms Renn left out an important factor that does not pertain directly to the employess. It’s the risk factor. It should be made clear to the employees that the owner is hanging out on a tree limb. Yes, the emplyees do control how quickly, slowly or not at all how that tree limb could get sawed out from underneath the owner but if it does, the employees just lose jobs, the owner can lose everything. It is in everyones best interest to know exactly where the buck stops.

  3. Jeffrey L. Frischkorn

    On a different topic, Norm. How is this for a boating promotion? Maybe it is something that copied elsewhere but our Minor League team here in Lake County, Ohio has a creative idea. Catch a portion of its idea: The Captains will host our first ever Nautical Night where fans can come to see a boat and yacht show, learn all about boating safety, meet the Coast Guard and get fishing licenses.

  4. dave boso

    Not everybody has to know what everybody else is doing, if an employee has to know what the boss is doing let him jump right in and start his own show. We have a false idea that every thing is public knowledge and that we all have to know it all. Example; the supermarket discount card, so you save a few cents on the stuff you buy, but look at the freedom you give up, now the store has a record of what you buy, when you bought it, and how much you paid, all they have to do is scan the card and it is linked with the register info who do they share that info with? other stores, the goverment, speaking of which how long till “big brother” issues his own card; save a few cents on the tax, now he knows what you have and when you got it…. way too much knowledge

  5. AnonymousBob

    I like the idea of sharing the high level bits of information without diving into all the minor details that make up an account status. If employees have an idea of what costs are associated with doing business and how their actions affect the bottom line, you have a better chance of buy-in by the employees. Taking it a step further and implementing a profit sharing system (when times warrant it) will generate more loyalty and you’ll see employees doing what they can to improve the bottom line. And, in times like now, they will better understand the cutbacks.

    To Dave Boso: don’t you think the idea of knowing what bits of your inventory sell through the best would be helpful? Don’t you think an employee that understands the basics of your business might prove beneficial in helping you control costs or find ways to boost revenue? Don’t you like having a database of your customers for follow up, promotion announcements, and general business development? You do know that it’s much easier to keep your current customers than it is to “buy” new ones, right? Those are the basics behind the customer loyalty programs a lot of companies use. If you want to worry about “Big Brother”, then go right ahead. I personally think it’s a short-sighted move. But, that’s just me.

  6. Komrade Carl

    I’m with dave. They are on a need to know basis as it relates to the job function.
    See we know who dave is but, as Bob says in his name he’s anonymous – so much for disclosure…..

  7. AnonymousBob

    Komrade:
    You don’t need to know who I am – just do your job. No positive or negative feedback for you!! Stay in the dark and behave like a good little mushroom. But I shouldn’t get upset when the owner raises the labor rate, drives up in a new Escalade, and I’m still making $15/hour working in the sun on customer’s boats. My work is generating tons of revenue yet my return on investment seems paltry and I still get to drive around in my 10-year-old F150. Makes sense to me. Maybe if the owner enlightens me as to what is involved in this quarter’s results, I can devise some cost cutting measures while also proposing some sort of profit sharing arrangement that allows all of us to succeed. Yes, I know the owner foots the risk of starting the business. Yes, I know the owner’s name is on the mortgage. Yes, I know the owner pays my paycheck. But I also know I bust my butt to help the owner with all those bits of running his/her (yes, their) business. If I could help the owner increase his bottom line while also increasing mine, then I think it would be wise to have the dealer share information on the “state of the business”. I thought we were a team. If not, I’ll take my hard-earned skills to a place that appreciates my abilities, work ethic, my desire to succeed, and my worth.

    It doesn’t matter what my username is – my goal is to help the marine industry survive/thrive. I’ll let the likes of you stay in the Dark Ages.

  8. Komrade Carl

    Bob Bob Bob,
    I drive a Land Rover Not a Gov’t motor gingerbread rig that looses value by the hour.
    You seem bitter that you only make 15 bucks an hour. If you don’t like the pay rate in the marine biz get out. By the way everyone is busting there butt. You have no rights to share in profits as you you take absolutely no risk except that you choose who you trade your time with. Bob It’s a pay to play world no matter what political Koolaid your drinking. It’s not only that the owner put up the intial money they put profits back in everyday even when there are non. FYI history is repeating it self & you hit it on the head. These are the dark days.. Glade I was prepared & doing well.

  9. Iamwithyou CARL

    Maybe those that feel compelled to share in the profits and wtant to know everything about the owners business would be willing to put dollars into the business and not just take them out during those weeks or months when there is no profit to share.

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