KNOW YOUR NUMBERS Open-book management begins, however, long before any sharing of the company P&L. You can’t simply show a group of employees an income statement and expect them to understand it without any education. You have to teach them, and that, according to Strite, is another big reason why more remodelers don’t become open-book managers.
“Most [owners] are technicians who have become managers and entrepreneurs,” Strite says, and he doesn’t intend that comment to be derogatory. “They’re doing the best they can with the knowledge they have,” he says. Gindele, a facilitator for industry consultant Certified Contractors Network (CCN), puts it bluntly: “Most of the [company owners] I work with don’t know how to read their financial statements.”
If you’re one of the majority who fall into that category, you will need to get yourself up to speed with your company’s financials before opening your books to employees. Strite advises retaining the services of an accountant, and not just any old bookkeeper, either, but a professional who knows the ins and outs of the remodeling business. “Owners should find someone who has quite a few clients in construction, preferably in remodeling,” he says. “I’m amazed at the number of accountants who aren’t that knowledgeable about job costing and over- and under-billing.”
Having a firm grasp on your numbers — what they are, how they relate to each other, etc. — will eliminate another hurdle that typically arises when company owners are considering open-book management: embarrassment. “If you don’t have a strong understanding of your numbers, that’ll be pretty well-displayed when you open up your books,” Strite says. He adds that this has the domino effect of demoralizing employees, who suddenly get the feeling that they’re entrusting their livelihoods to someone who appears to be shooting from the hip.
Think of it as though you were hosting a dinner party. Most people wouldn’t let their friends into their house without straightening up a bit first. Similarly, don’t let employees look into your financials until they’re correct and logically arranged.
But correct, up-to-date numbers don’t always paint a pretty picture. Can a company that’s losing money still be open book?
Gindele argues that it’s at least as important for a struggling company to open its books as it is for a more prosperous outfit to do so. “Employees can’t be expected to fix that which they don’t know is a problem,” he says. “People operate under the assumption that if there was a problem, someone would tell them about it.”
This point — that employees need to know when things are going badly — really gets to the heart of why proponents of open-book management advocate it. “Ideally, I would like a whole company of individuals who think like business owners,” Olson says.
SLOW AND STEADY As mentioned earlier, becoming an open-book company is a gradual process. When Strite instituted his open-book policy, he first made sure that he could explain his company’s numbers. His next task was to get his managers to a similar level of comfort. That accomplished, it was then time to roll it out to the rest of the team.
But not all at once. “You have to give it to them in bite-size pieces,” he says. Strite recommends starting with job costs, a category of expenses with which field employees are somewhat familiar. Once they understand the direct costs of everything that goes into a project, you can delve into concepts such as overhead, net profit, and gross profit margin. It takes several months to introduce everything, and the educational process never really stops. “If there isn’t repetition, it’ll get pushed to the side,” Strite says.
Tim Frost, president of Peregrine Design Build, in South Burlington, Vt., structured his introduction of open-book management much like an academic course. He started by explaining revenue to his employees and moved on from there, eventually covering cost of goods, gross profit and how gross profit relates to revenue, as well as markup, margin, overhead, net profit, and the work-in-progress (WIP) statement. In the beginning, he was the teacher, but eventually he turned those duties over to his controller.
Frost’s company began the process of becoming open book with mandatory meetings every two weeks in an intensive education process — what he calls “Chapter One.” His company now meets monthly to review financials.