When all the weighted items in a tower sit on the top floor, the whole structure is bound to collapse.
Business is no different. Think of the “weight” as business acumen, that valuable knowledge of finance that rests at the core of every healthy company.
We recently read a fantastic article from food multi-business Zingerman’s on this subject. In it, the writer describes 10 rules that the company has adopted to engage every employee in its financial success, from accountants to managers to dishwashers.
Their vision is right in line with ours; we are champions of extending profit responsibility all the way down the management chain. For a company to do that successfully, every individual must have access to—and be equipped to understand—financial reports.
Companies don’t have to make it complicated; Zingerman’s provides a condensed report called the Department Operating Report that usually runs about a page long. Every employee can look over that report and comprehend essential information about the financial state of their department, division, or location.
As employees begin to understand the substance of financial reports, they can learn to analyze the data. To jumpstart the learning process, here are four things every employee should know.
1) They should know the common language
The idea of developing a common “language” across a business is near and dear to us. We really believe that the best way for people to understand each other in a business setting is to learn the language of finance.
Without a common language, effective teamwork is nearly impossible. The Zingerman’s article talks about how employees in the company were using the word “sale” to mean different things. Some used the word to refer to promises of future payment from customers, while some restricted it to mean only transactions in which money was received instantaneously.
You can imagine the issues that might arise because of this communication discrepancy. If a manager views “sales” on a report as transactions with immediate payouts, this will inform her inventory order. But if the person responsible for creating or relaying the sales amount includes promised payments in the number, the manager may be over-ordering and heading for a disaster.
2) They should know how their decisions contribute to results
Whether they realize it or not, all employees are connected to the financial results of the business.
It’s Newton’s Third Law: for every action, there is an equal and opposite reaction. If one employee dips into company cash to order inventory, there is that much less cash for someone else to use for their particular purposes. If one person make a sales forecast, other managers will order supplies and make choices based on those projections.
Even the seemingly minute day-to-day tasks in a business affect financial results. Good customer service is equal to an investment. Throwing away unused inventory, (e.g. salt packets in a restaurant) accelerates the need to buy more. Rolling in 10 minutes late to work can result in one or two missed sales, depending on the circumstance. Every action by every employee matters.
3) The should know that profit is not the same as cash
Profit and cash, while closely related, are not the same. Since not everyone understands the individual terms, it’s not surprising that putting the two next to one another can confuse people.
Profit, for example, isn’t just extra money that goes “in your pocket” or vaguely “back into the business,” as one Zingerman’s employee thought. Instead, it’s money used to pay down loans, pay taxes, and pay shareholders.
As for the difference between profit and cash, profit is the long-term driver of the business while cash sustains the short-term. A business might make a very profitable sale but not be paid for quite some time; in that case, profits are high but cash from the sale is nonexistent. Or the business may decrease its cash by spending it, with the hopes that profits will expand in the long run.
All employees need to understand this difference. Just because they contribute to a profitable sale doesn’t necessarily mean the company is better for it in the immediate future.
4) They should know that timing is everything
Even though financial analysis is fundamentally all about numbers, it has its nuances. For example, the income statement (or P&L) will show you how profitable you are, but not when money actually comes into the business.
The average span of time between making a sale and getting cash in hand is called “days sales outstanding.” It’s one of many aspects of financial reporting that prove business is not just about if or how money comes in, but when. Timing, it seems, is everything when it comes to generating accurate plans and reports.
Another aspect of time is the value of cash today vs. cash tomorrow. The Zingerman’s article gives the perfect example for understanding this. If someone asks to borrow $10 from you and promises to return it within the hour, you likely won’t take issue.
But if they ask for $10 and say they’ll return it in a year, you’ll probably expect a bit more returned to you on top of the $10. To wait that long just to receive the same amount you lent makes no apparent sense, business-wise.
This, combined with ever-present inflation, means that any given dollar amount will not be worth as much in the future as it is today. Understanding the relationship between time and cash flow will inform decisions made at every level of a company.
Every employee makes choices that affect the big picture. The question is this: will they be as informed as possible when they make those choices?
These four tips certainly don’t cover everything employees need to know in order to analyze a financial report, but they are a great place to start.
It’s time to put some weight at the base of that tower.
We specialize in teaching business acumen at every level of the ‘corporate tower.’ To see how our courses are customized for different tiers of a company, click here.