This article is an excerpt from the Shortform book guide to "The Great Game of Business" by Jack Stack and Bo Burlingham. Shortform has the world's best summaries and analyses of books you should be reading.
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Why should you share financial information with employees? How do you explain the numbers to them?
According to Jack Stack and Bo Burlingham’s book The Great Game of Business, employees can help the business succeed if they know the numbers behind the company. This includes balance sheets, income statements, and transactions.
Read more to learn how sharing financial information with employees helps businesses.
Sharing Financial Information With Employees
Once employees understand the big picture of the company’s purpose, goals, and operations, practice sharing financial information with employees by introducing them to the numerical details of how the company works toward these goals—particularly financial numbers. Stack and Burlingham say that numbers are the language of business, and employees must understand them to effectively take ownership and help the business succeed.
(Shortform note: Understanding financial statements is arguably important because it reduces misunderstandings between employees. For example, if two colleagues, Sarah and Hank, weren’t taught how to read and understand financial documents, Sarah might define ‘sales’ as transactions that have already been completed, while Hank may believe ‘sales’ include promised future transactions. If Hank tells Sarah that they’ve sold 30 copies of a book, she’ll order enough copies to replace those orders. However, if only 20 of those sales have actually been completed, they could end up over-ordering and clogging up their inventory.)
Explain Balance Sheets and Income Statements
The most important financial information for employees to understand are balance sheets and income statements, Stack and Burlingham argue.
(Shortform note: A balance sheet provides a detailed snapshot of the company’s financial status on a specific day, usually the final day of a set accounting period. It shows the state of the company’s specific assets and liabilities, such as cash and accounts payable. An income statement shows how the company’s been progressing financially over time. It provides a more general overview of the company’s revenue and expenses.)
Balance sheets expose financial problems in the company, Stack and Burlingham explain, while income statements can help diagnose the cause of those problems and find a solution. With access to this financial information, employees can diagnose and solve these problems as they occur, rather than waiting for upper management to notice and diagnose them.
For example, let’s say a car company’s balance sheet shows that the company is losing money. Employees look at the income statement and realize that the manufacturing department’s expenses have been increasing over the past several months. A closer look at the manufacturing department’s expenses shows that they’re over budget because one of their suppliers increased prices. The employees alert upper management and recommend a cheaper supplier that they know makes quality items. Thus, the company is able to offset the increased expenditure quickly and effectively.
Offer classes and tutoring in reading balance sheets and income statements, Stack and Burlingham recommend, both for new employees and established employees that need a refresher. The authors maintain that the increase in productivity and problem-solving that knowledgeable employees offer is worth the cost of educating them.
(Shortform note: Before worrying about employee education, financial experts recommend making sure your financial statements are easy to read and understand. Many businesses use poorly constructed or confusing financial statements, and teaching employees how to read these is difficult and inefficient. However, if your financial statements are accurate, clearly organized, and regularly updated, your employees will be able to understand them faster and more accurately.)
|How Balance Sheets and Income Statements Help Solve Financial Problems|
According to Stack and Burlingham, balance sheets expose financial problems in the company while income statements can help you diagnose the cause of those problems and find a solution. While it’s true that these documents are both important to recognizing and diagnosing financial problems, the authors are arguably wrong about how they do so.
Balance sheets show the specific state of every asset and liability, which seems useful for identifying the root cause of a larger issue, rather than the general existence of the issue. For example, a balance sheet may show that a quarter’s equipment repairs cost $1600, but it doesn’t show that this is higher than previous quarters. As a result, employees may not recognize this higher price as a problem.
Similarly, income statements expose general fluctuations in revenue and expenses, so they may be more useful for identifying the general presence of a financial issue rather than the specific cause of that issue. For example, an income statement may show increasing expenses, but it won’t show the specific high equipment repair costs that are causing that increase. As a result, employees may recognize that there’s a problem, but they’ll be unable to find or solve the root cause of the issue if they only look at the income statement.
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- The best and most efficient way to create a successful business
- Why employees should see the company as theirs rather than just somewhere they work
- The principles of fostering employee ownership