Article for Construction Business Owner magazine, 2011 (series of three articles)

Transcription

1 Article for Construction Business Owner magazine, 2011 (series of three articles) Series Title: Creating a Culture of Employees Who Think and Act Like Owners Article One Title: The Importance of Educating Your Employees About Business and Finance (They Think You Take Home Wheelbarrows of Money) Brad Hams, President, Ownership Thinking I am on a mission to eradicate entitlement, an insidious mentality that, in my opinion, is destroying our country. People with this mentality believe that they should get things because they exist. They believe they should get things because of who they are rather than what they do. Unfortunately this mentality has been cultivated over several decades by lowering standards in schools (it s more important to feel smart than be smart), by eliminating the competitive element in games and sports (it s more important to feel like a winner than be one), and generally by giving people more and more and requiring less and less of them. The result of all this is a workforce made up of individuals who feel entitled to a work environment and compensation that is not commensurate to their output. So how do you, as a business owner, deal with this? The good news for you is that people are really not very happy in this pampered, unrealistic environment they ve grown up in. People are actually happier in an environment where they are learning and challenged, where they can be a part of something and see their contributions. Where they have purpose. Abraham Maslow, the man who gave us Maslow s Hierarchy of Needs, once said The only happy people I know are the ones who are working well at something they consider important. What you ve read so far is not theory. It s based on my 15 years experience as the founder and owner of Ownership Thinking, a consulting and training firm dedicated to creating cultures of employees who think and act like owners, and who become active participants in the financial success of their organizations. In that 15 years we have

2 helped to create this culture in over 1,000 companies, and with amazing results; both financially and culturally. In the next three issues of Construction Business Owner magazine, I will be sharing with you the three elements required to create an ownership culture: 1. Teach your employees the fundamentals of business and finance 2. Measure through the windshield rather than the rearview mirror (focus employees on the leading, activity based measures that drive your financial performance) 3. Create a broad-based, self-funded incentive plan tied to the (guaranteed) increased profitability of your company So, let s get started with number one, business acumen training for employees. Before I give you some tips on how to do this, though, I d like to tell you why you need to do it. Here s why: What your employees don t know can hurt you. To emphasize my point, I d like you to do a little experiment. Go out in the field and ask some of your employees what percentage of sales in their company is profit. When I ask this question of employees in companies where information has not been shared, 50% is a pretty common answer. My experience working in the construction industry is that 3% to 7% is generally closer to the truth. So why is this a problem? The problem is that when employees believe the company is making that kind of money, they become wasteful. In fact, there s almost a bitterness going on in the back of their minds. The thought process is something like this: so we left that material behind (or wasted that labor, or damaged that truck, or had to return to a job and perform some rework, or......), we re rolling in the dough. And by the way, they don t say we re rolling in the dough, they say he (or she) is rolling in the dough, of course pointing to you, the owner.

3 And so, if you want to get your employees to begin thinking like you (and, as we like to say, share the insomnia), then you must start by teaching them the realities of business and finance. Over the years, I have learned that the most effective way to teach finance to non-financial employees is to associate personal finance to business finance when you do it. Why? First of all, this takes the intimidation out of a potentially intimidating subject. Most people assume that finance is very complex, when in fact it really is not. Second, personal and business finance are very much the same. Here are some examples: An income statement in business is made up of three simple components: sales, less expenses, equals profit (or loss). An income statement at home is the same: our paycheck, less our bills, equals our savings (or not). A cash flow statement in business is also made up of three simple components: cash in, less cash out, equals our change in cash. A cash flow at home consists of our cashed paycheck, less what our spouse and kids spend, which typically equals nothing! A balance sheet in business consists of what we own (equipment, materials, etc.), less what we owe on what we own (accounts payable and debt), plus what we really own (owner s equity). At home, you could use the example of a house. Our house, less what we owe on the house (the mortgage), equals what we really own, or the equity on the house (the garage door, perhaps). The next thing that is important for employees to know is why we need cash. What do we use it for? The first thing that employees will think of when asked this question is, of course, payroll. Payroll is the largest expense in most organizations, but

4 of course there are many other expenses that must be paid for: equipment operation, fuel, materials, facilities, and utilities, to name a few. We need cash in an organization for other things beyond just expenses, however. Particularly if we d like to grow. To remain competitive and to grow, organizations need cash for equipment or capital improvements, debt retirement, retained earnings, etc. And so, that 3% to 7% (as opposed to 50%) is not even going into the owner s pockets. Much of it is reinvested. To wrap up this first article, I m going to give you an exercise to do with your employees. It s a lot of fun, and quite an eye opener for both employees and ownership. Gather your employees together, and go through the following with them: o Imagine that you have a company that generates a 5% profit on average. If you were to sell a dollar s worth of product or service, how much of that would end up on the profit line. The answer, of course, is a nickel. o What if you were to save a dollar (or ten thousand dollars)? This may be the result of reducing rework or scrap, improving labor efficiencies or reducing overtime. There are a myriad of ways one might save money. Every time you save a dollar in your business, the entire dollar goes to the bottom line. o Now, let s emphasize the importance of this. In the example above if we were to save a dollar (or ten thousand dollars), which again will go directly to the profit line, how much revenue would it have taken to get that money to the profit line? The answer is 20 times that amount (if we have a 5% profit as noted above). Now, here is the exercise: o Break your employees into small groups of about five employees in each group. o Take out a short stack of dollar bills, and tell the group: Imagine that is was our revenue, and this table in front of me is our business. As we go through the month, we are spending this money on all of our expenses, such as payroll, materials cost, facilities, fleet, etc. (lay the bills down on the table a few at a time

5 as you do this, and finish with one bill left in your hand). What s left over here is our profit (waving the bill). Now, the majority of this money went toward our expenses. But there are a bunch of cracks in this table, and a lot of this money is simply falling through the cracks. The cracks include things like scrap, rework, unbilled time, or downtime. o Give your employees about 10 minutes or so to brainstorm the cracks in their company s table. At the end of that time, go around the room a few times, and ask each group to give one thing for their list each time around. Write them on a flip chart. o When the page is full, stop and ask them: how much money do you think is on this piece of paper? Lead them a little bit by asking: do you think there is a hundred thousand dollars here? Two hundred? Three? Stop when they want to stop. I recently did this with a $16 million construction company, and they stopped at $500k. And they were right there was easily $500k on that piece of paper. To emphasize the importance of this, you can then divide this amount by the profit percent in your company to see how much revenue it would take to get that amount to the bottom line. In this company, profit had averaged 6%, and so $500,000/.06 = $8,000,000! So, business and financial education is the first piece of the Ownership Thinking puzzle. In the next two issues I will provide you with tips on how to measure the right things in an environment of high visibility, and how to create incentive plans that really work.