Often employees have no real notion of what it costs to operate a business. They think, for example, that the checks they collect go right into the owner's bank account. Profit sharing is a way to make them aware of costs. But it's hard to have a profit-sharing program if your profits are low, and many times companies don't know whether or not they're making a profit until the end of the year.
About four years ago, I set out to get ideas from employees for saving the business some money. I realized then that employees need to be educated about how a business works. My goal was to build trust between the company and the employees, improve interdepartmental cooperation, and encourage longevity.
Teaching What Things Cost I put my business costs — materials, labor, overhead, taxes — on a PowerPoint slide and began sharing that with all employees at monthly meetings. (Note: They see my company income statement, but not what individual employees make.) They can see the gross profit of the business and how sales and marketing expenses come off that gross profit. They can see the cost of phones, lights, gas, trucks, and the insurance costs for those trucks. They're aware that we spend $40,000 on gasoline for our 20 trucks. I have installers who now know what my cost of goods sold is. We are teaching all that.
Profit Sharing, the Second Piece Open-book management is not just about getting together and sharing numbers. It's about empowering the employee to feel like an owner. We put the second piece in place by setting up a profit-sharing program. First, we asked employees for ideas about how the company could save money. Then we began to show them how these ideas were saving money.
In 2003, the first year we did it, we gave out $100,000 in bonuses and reduced staff turnover by 20%. On average, employees at our gutter and gutter protection company each took home $2,500. In 2003, net sales revenue per employee was up 17% — from $75,000 to $89,473. Our average sale and closing rates were up. That's because employees were thinking about the costs and effects of doing business.
For example: In the gutter business, if the crew doesn't think about the last run of gutter going on the house and cuts the coil at the end of the machine, you throw away 8 feet of materials worth six or seven bucks. If you're doing a lot of volume, it adds up. Today such waste is rare, and we've seen dramatic savings in materials because installers know they have a stake in the profitability of the business.
Open the Books Monthly meetings keep employees apprised of how we're doing. We put our company goals on the wall so everyone can see sales and closing ratio by salesperson, and also see how production is doing.
And once a quarter we ask employees what the company could be doing to save more money. If the company generates more than 5.1% net profit, 35% is divided among non-managerial employees. That's their incentive.
How to get started? Write things down. Develop systems for controlling expenses. Educate employees about how a business works and what it means to bring value to the marketplace. Prioritize the actions needed. And keep the focus on the numbers. —Bill Frazier is owner of Austin Gutterman, a gutter and gutter replacement business in Austin, Texas. He also operates a business boot camp for gutter company owners, email@example.com.