Over my four-plus decades in the business world, I have mentored and educated more than 20,000 business managers, executives, and salespeople to understand the financial impact of their decisions. My latest book, "The Bakers Dozen rules of Highly Successful Business Operators." encapsulates these principles with practical and proven approaches for business leaders to bridge the gap between operational behaviors and stakeholder expectations.
Do you expect your employees to think and act like owners? If so, read on.
If you are an entrepreneur wanting to grow your business, then this article is for you.
Building on the message of my last blog, "You Cannot do it Alone," entrepreneurs, especially founders, tend to be the constraints that limit corporate growth. Why? Because (generally speaking) entrepreneurs have difficulty trusting people to think and act like you, the owner. This is true even when you may be an excellent delegator and a trusting operator. Please continue reading, and you will understand what I mean.
What would happen if you decided to travel for six months while staying 100% offline?
How comfortable would you feel leaving your "baby" and trusting that your business is being led by your managers the same as if you were there?
How would you score if zero represents no confidence and 10 represents 100% confidence?
If you score anything less than 10, then read on.
Your business exists for one reason: to generate sustainable profits and cash flow, which will ultimately provide you (and your partners) with a desirable lifestyle and retirement one day. If you intend to use your profits to give back to society rather than "living it up," that's also OK, but you cannot achieve this without generating sustainable profits and cash flow.
Since your employees are the custodians of your company's profits™, they are, in effect, a direct extension of your checkbook.
That being the case, should they not be fully aware of the financial impact of their decisions?
If you agree with this statement, then:
1. How financially transparent are you with your team?
2. How financially literate are your employees?
Suppose you are already partially or financially transparent, are you 100% comfortable that your employees understand concepts such as the difference between profits and cash flow, the impact of discounting, how much revenue is required to offset step-up costs, etc?
How meaningful are your KPI's? Does an improvement to a metric move the profit or cash flow needle?
While these concepts may be intuitive to you and your financial team, don't assume that the financial information that you share with your employees is fully understood.
The Curse of Knowledge: Source Harvard Business Review
In 1990, a Stanford University graduate student in psychology named Elizabeth Newton illustrated the curse of knowledge by studying a simple game. She assigned people to two roles: "tapper" or "listener." Each tapper was asked to pick a well-known song, such as "Happy Birthday," and tap out the rhythm on a table. The listener's job was to guess the song.
Throughout Newton's experiment, participants tapped a total of 120 songs. Listeners guessed only three songs correctly: a success ratio of 2.5%. But before they shared, Newton asked the tappers to predict the probability that listeners would guess correctly. They predicted 50%. The tappers got their message across one time in 40, but they thought they would get it across one time in two. Why?
When a tapper taps, it is impossible for her to avoid hearing the tune playing along while she taps. Meanwhile, all the listener can hear is a bizarre Morse code. Yet the tappers were astonished by how hard the listeners had to work to pick up the tune.
The problem is that once we know something—say, the melody of a song—we find it hard to imagine not understanding it. Our knowledge has "cursed" us. We have difficulty sharing it with others because we can't readily re-create their state of mind.
Have some fun and select a few songs and test this principle for yourself with your employees.
Remember that there is a difference between understanding accounting principles and communicating the principles effectively.
When asking business leaders to estimate the level of financial literacy amongst their managers and executives at a basic level, the consensus is that they are about 50-60% literate. Having tested thousands of senior managers, we have found that the average level of business literacy is less than 38%.
Imagine how much profit is left untapped because managers make decisions while being so financially naïve.
Let's refer back to my early question regarding your comfort level of leaving your business in the hands of your employees.
If you want to work ON your business, not IN your business, your employees need to think and act like owners. Remember that nobody washes a rented car.
Possible solutions:1. Engage your employees in your decision-making process.
2. Help them understand the financial implications of their decisions.
3. Incentivize them accordingly (WIFM – what's in it for me), and only once you have engaged and educated them is it reasonable to hold them accountable.