I’ve been in discussion with several CFOs about financial literacy among their managers and C-level executives. They all seem to share a concern about what seems to be an inherent problem for businesses: non-financial people in operations fail to understand the full financial ramifications of their actions.
Why is this important? Well, a car rental company would not rent their asset to a driver that wasn’t licensed to use it.
Why, then, would a company allow non-financial employees to manage millions of dollars worth of assets if they didn’t understand the full implications of mismanaging the funds?
Financial literacy is such an important skill that we decided to do a survey. We asked CFOs the following 3 questions:
On a scale of 1 – 10, with 10 being the level of a CFO, how would you rate the financial literacy level of:
- Your managers?
- Your C-level executives?
- Do you think that if their level of financial understanding were to improve, they could use that newfound knowledge to think more strategically and improve the profitability of the company?
And here is the breakdown of how they responded:
Question 1. The average answer was 4.7, with the lowest answer being 2 and highest being 6.
Question 2. The average answer was 5.2 with the lowest answer being 4 and highest being 7.
Question 3. 82% of respondents answered “yes.”
Many CFOs also allowed us to evaluate some of their non financial managers and C-level executives to determine their actual level of financial literacy.
Here are the evaluation results: Managers averaged only 42%, and C-level executives fared only slightly better, with an average of 44%.
I found these results fascinating, as did many of the CFOs; who grossly overestimated the level of financial literacy among their managers and C-level executives, the very people responsible for millions of dollars worth of budget.
What I found even more interesting was that most CFOs recognised that an increase in the level of financial literacy of their managers would probably improve financial results, while the majority also recognised that their managers lacked these very skills.
6 questions you should be asking yourself when performing a needs analysis:
1. How do you define financial literacy (or business acumen)
2. Do you consider financial acumen to be an important skill set when promoting managers to a higher level of responsibility
3. When a needs analysis is performed in your organization, is financial literacy among the topics that are addressed
4. Do you test the level of financial literacy among your managers?
5. Do your non-financial managers and C-level executives understand the full impact of various decisions on key financial metrics and ratios?
6. Do your managers and C-level executives believe that their budgets have an impact on investor relations?
Needless to say, unless your non-financial employees were actually tested, you would never know the answers to these questions.
Contact us to for information about our unique needs assessment testing. email@example.com
Categories: Corporate Blog
Are you having issues with your incentive programs?
The problem may not be what you think it is…
John, the CFO has spent hours preparing a financial presentation to the employees. He is talking about the month end results and how the financial drivers relate to the company’s incentive plan. (Yawn)
Everyone has been very busy but very few people earned their bonus. Employees are not happy.
The PowerPoint slides are filled with data, graphs and statistics.
Everyone is either glassy eyed, drooling or just dozing off. Why?
It could be the high carb lunch that you provided but the boredom is more likely due to one of the following reasons.
- He used terms and acronyms that non accounting people do not understand. To John these are intuitive and basic. To the rest of the audience it’s like listening to a foreign language.
- There is too much data on each slide.
- The information is BORING.
- There is little connection between the data and operating activities. In other words people look at the ratios and metric and ask themselves “how can I influence the numbers?”
- He did not use the “cause and effect” argument. Every action has a consequence. What is successful in one silo of the business could be devastating in another.
Sharing financial information with employees does not mean that they understand it.
And if they don’t understand it how can they be expected to improve their performance?
Crucial elements that are needed for an incentive program:
- Use the KIS principle (Keep It Simple). Use simple numbers and language to so that people can understand the plan and what is needed to improve results. Don’t use convoluted formulas or conditions. Trouble hides in complexity so (again) KEEP IT SIMPLE.
When I designed an incentive plan for the 400 employees in my manufacturing plant I decided on ONE PRIMARY RATIO that drove all the right behaviours: the percentage of total payroll to sales. The bonus was divided equally amongst all staff with the team leaders earning double. The additional bonus was paid by the company so that it did not affect the rest of the staff.
The staff were sensitive to head count. Why share the bonus with more people? They would carefully consider whether it was better to work overtime, outsource, employ more people or even refuse the order
Sales staff were focused on higher margin sales. The higher the sales while maintaining payroll costs, the better.
Supervisors were sensitive to product mix. The more difficult the mix, the lower the production therefore the lower the sales number resulting in a poor ratio.
They learned that a busy factory does not mean a profitable factory.
There were a lot more benefits especially with regard to how the staff communicated with each other. It was music to my ears each day when I listened to their arguments.
- Relevant. Overhead allocation such a portion of the rent cannot be controlled by your supervisors and should not be included amongst the costs that impact his/her bonus.
- Quick to calculate. There is no point recording the score of a game after the game is finished. Your employees need to be able to track data on a regular basis. Update information monthly or even weekly when possible.
- Credible. If employees doubt the numbers, management will lose credibility. Manipulating numbers for tax or other purposes resulting in a decrease to bonuses will (understandably) anger your people.
- Stick with the plan. Have you ever tried taking candy away from a child? Once you make a promise stick to it. If you made an error when designing the plan and it costs you money you will have to absorb it. Learn from your mistakes and be sure to include a clause that allows you to adjust the plan the next year. Changing the rules mid game will cause you heartache.
- The incentive plan can only work if people are trained to understand the plan and what activities are needed to drive results.
Who should NOT do the training?
The person that has a lot of technical knowledge is not necessarily the right person to teach it. This is especially true for finances. Why?
- Finance is an abstract, dry and intimidating subject if taught in the wrong manner.
- Well trained professionals like accountants who do not have the right training skills tend to suffer from the “Tappers and Listeners – The Curse of Knowledge”.
- The time spent to design and deliver the course.
- The lost productivity while employees are sitting in class.
- The actual or opportunity costs when people make poor decisions because they did not benefit from the training.
- The negative attitude that results from a poor experience.
On a fully loaded basis, you may find that your internal training initiative is costing you more than you think.
Do you know that (according to our evaluations) non financial employees are more than 58% financially illiterate even after traditional financial training?
Have some of your employees test their level of financial literacy with 6 basic questions and see how they do. You may be in for an unpleasant surprise…
Summary: no matter how well your incentive program is designed it will not reach its full potential if your people do not understand the financial implications of their decisions.
Contact me if you want us to add some custom designed questions. It won’t cost you a cent.
Categories: Corporate Blog
Do you suffer from one or more of the following symptoms?
1. Employees are not held accountable for their budgets
2. Profits are falling, cash flow is a problem resulting in your training budget being cut
3. The corporate culture lacks trust and employees are generally frustrated
4. Employees have a sense of financial “entitlement” and make demands for more compensation (often for less work)
5. There is no incentive plan that drives performance
The root cause of the problem
I joined a unionised vertical manufacturing company that was traditionally profitable but was suffering massive losses. My mandate as president of the company was to restructure the company to make it profitable. The company suffered from all of the above symptoms plus plenty more.
I soon discovered what I believe to be the root cause of the problem.
There was no meaningful and productive communication between the owners and the managers. Some examples included:
• There were no clearly defined financial objectives which meant no financial accountability
• People were being ‘micro-managed’ resulting in a lack of trust
• The company did not promote any training of any kind
• The union and management had different agendas
I spent my most of my time ‘putting out fires’, fighting with the union and my partners, trying to manage cash flow and managing angry customers due to poor deliveries and sub-standard product. Somehow I could not get a grip on the reasons for such poor behaviour by both senior management and employees alike. Everyone always seemed to have a logical reason for under-performing, poor deliveries and bad quality, all the while demanding more money and benefits. As I resolved one issue, another one arose. People were permanently lined up outside my office wanting my opinion on how to resolve matters that I felt they should have been able to resolve on their own. These were clearly all symptoms of the same problem. But what was the problem?
The power of financial literacy
I was heading out to the West Coast one day and bought a book at the airport about ‘Open Book Management.’ I did not close it again until I reached Vancouver 4 ½ hours later. As it happens the timing was impeccable as we were facing union negotiations. You may recall that during the early 90’s, interest rates were in double digits and Free Trade was having an impact on the manufacturing sector in North America. To add salt to injury, our union was making demands that could have bankrupted our company. We had some choices: close the factory, cut head count, increase prices (yeah right), cut costs or negotiate a deal with the union to help us survive.
Clearly a blend of all the options would have to happen but controlling the labour costs without cutting head count was a challenge. That is until I read about the concept of ‘Open Book Management.’
No one washes a rented car because they have no sense of ownership.
Consistent with this theory, employees tend to look after a business differently if they have “skin the game”.
It is upon this theory that I entered an agreement with the union. “You have a choice” I said. “Your members can earn however much they want through performance, or they are going to starve because we are going to shut the plant”. After presenting our business plan, they eventually agreed to a three year wage freeze in support of a gain share program whereby the employees would earn a bonus once they passed the required threshold. The threshold included profitability and cash flow minimums. We also created various Key Performance Indicators as part of the required thresholds. I made a promise that I would educate the employees to help them understand how to improve profits and cash flow so that they could increase their own wealth. While there were certainly a number of challenges (some of which I will address in future blogs,) the initiative was a major success.
1. It changed the corporate culture in a positive way. The employees felt empowered and trusted.
2. It made our employees at every level in the organization more sensitive to profits and cash flow, which dramatically improved financial results
3. It had a strong influence on our compensation costs which became more results-driven
4. People became accountable for their budgets
5. The union became less hostile because their members were earning more money through the gain share program than they could ever have negotiated through traditional means
6. Communication between management and employees became focused and productive
What is the bottom line? We had some of the best artisans in the industry ranging from engineers, to designers, marketing and branding. All these resources were limited in their ability to perform because they did not understand the financial implications of their decisions and as a result were exercising poor financial judgement.
I learned 4 major lessons:
1. What cannot be measured cannot be managed
2. Incentive plans must drive the right behaviours
3. Empower people, set up the right kinds of controls but don’t micro-manage.
4. Financial numbers tend to take away emotion, which allows managers to focus on operating behaviours rather than other less important issues
Was this an easy transformation? Heck no! In my next blog, I will share how we transformed our business into an educated workforce that thought and behaved like owners and how you can do the same.
Categories: Corporate Blog