Is keeping open books a good idea?

Some years ago, when I owned a twelve person software firm, I mentioned to my father-in-law that I openly shared company finances with my employees. The monthly staff meeting included current month and year-to-date financial statements, and there was often a discussion of the company’s health and prospects for the future. With the exception of individual salaries, there was nothing they couldn’t see, including balance sheets, sales figures, and profit & loss statements.

My father-in-law, who had spent most of his working life as a business owner, was aghast. He said, “Is that a good idea? Giving them that much information will eventually come back and bite you. If you run into even temporary financial difficulty, your openness may trigger morale problems. And if you have a very profitable year, they will want more money.”

His comments didn’t worry me, because I knew that my employees were generally happy. Recent years had been good, and I often distributed a portion of the profits in end-of-the-year bonuses. Also, they were so aware of the business issues facing the company, and the importance of keeping a reserve, that they weren’t even upset those times they didn’t get bonus checks after a profitable year

Even so, about a year later, my policy of openness was put to the test. Our financial picture had suddenly changed for the worse and we were bleeding red ink at the rate of $50,000 a month.

They already knew, from previous staff meetings, that over the past year we had completely depleted our cash reserves in gearing up to introduce a new product. And the rumor mill had already distributed the news that I had covered last month’s payroll with a personal check.

I had just gotten the current month’s figures and we had lost another $50,000. The future of the company was at serious risk.

Because of my fear of how the employees would react to more bad news, I quietly canceled the monthly staff meeting. I had no idea how to put a positive spin on things.

I then found a string of excuses to delay the next month’s meeting, day by day, and week by week. Finally, I could no longer postpone the inevitable. I would have to tell them the truth and face their reaction.

At the meeting, I told them we had continued to lose $50,000/month, for three months now, and that I saw no signs of a turn-around. With no reserves left, these were real loses and not merely paper losses, and I was covering them personally. Still worse, now that the new product had been released, it was bringing in only a fraction of the revenues we had expected.

Suggestions were offered, but most were wishful or totally impractical, including one employee’s suggestion that we install showers so she could move out of her apartment, live in the office, and contribute her rent to help keep the company afloat! It didn’t help when I pointed out that all twelve of our salaries, together, wouldn’t cover a $50,000/month loss.

I left the meeting totally discouraged, now sure that my father-in-law had been right about the dangers of being so open with company finances. If I could only have kept the lid on this a little longer, I might have had enough time to find a way out of this mess. As it was, it seemed I had only made things even worse than they already were.

After the meeting, to assess just how depressed I had made my staff, I began asking how people felt.

The first response took me totally by surprise. Stacey, one of my newer engineers said, “I knew things were bad, but I didn’t think they were this bad. Now that we know exactly where we stand, I’m sure that, together, we can find a way out. I’m excited!”.

In a state of total disbelief (was he clueless, just too green to know any better?), I asked the others. Almost to a person, I got the same response. They were thankful for the trust I showed them in being honest about our situation and were both challenged and energized!

Apparently, dealing with a hard reality they now understood was vastly preferable to coping with an unknown they could previously only feel, but not define. The energy they had spent worrying about what was not being told was now freed to focus on strategies for improving the situation.

Over the next few weeks, without much direction on my part, they formed into teams and came up with several product and marketing ideas that gave them and me some hope for the future. They were determined and hopeful and began putting their plans into effect.

Miraculously, within a month, things began to turn around. Not only did we not have to lay anyone off, but the next twelve months were the best twelve months in our ten year history in terms of both sales and profits.

While it would be naive to say that openly sharing company finances will, by itself, create this kind of teamwork, employees will make surprisingly mature and intelligent decisions when they are trusted with accurate information. With insight into the financial realities of the business, it’s possible, even likely, that they will act more like owners of the company than employees waiting for their next paycheck.

Originally published by the Lewiston Tribune - Business Times, January 1998, Lewiston, Idaho