As a longtime sales and marketing consultant to roofing contractors, I always have advocated open-book management. To me, that means sharing financial statements and the financial condition of your company with your employees.
Obviously, not all contractors practice open-book management. I sometimes get pushback from contractors who tell me they don't want employees knowing how much the owner makes or how profitable a company is because then employees may expect raises.
But every time someone moves to open-book management, the same thing happens: Employees are shocked at how little the owner makes because usually they believe it's two or three times the actual amount. Employees are equally surprised to learn net profit is 5 or 10 percent. Many employees believe once materials and labor are paid, the rest of the price of the job goes in the boss's pocket.
If you think about it, this makes sense. If you're not practicing open-book management, how would employees know what your company's costs are? They know what direct costs are—materials and labor—but they often don't account for fixed and variable costs, payroll taxes, FICA, unemployment insurance, workers' compensation or liability insurance. And they don't factor in rent, equipment, office supplies or cell phone costs when considering a job's total price.
Shot of confidence
It's no secret the largest obstacle to getting a job is the salesperson's attitude. Many salespeople find themselves in sales slumps or unable to close a deal for one reason or another. The usual excuses are the leads are terrible; the economy is bad; or any number of excuses they invent. Most salespeople believe their company's prices are too high.
One of the first things that happens when you share your financial information with employees is salespeople get a confidence boost. Show them the numbers, and they suddenly see the company's making a 10 percent profit. Now, it's clear why that $10,000 job can't be sold for $6,000 or $7,000. It's also clear during a multibid situation for that $10,000 project why another company's $7,000 price can't possibly be priced correctly. The task of figuring out what the difference is and selling that difference to the homeowner or building owner gets a lot easier because your salespeople believe it themselves. So, in essence, open-book management provides your salespeople with a valuable tool.
The production side
The effect open-book management has on the production side is just as useful. Production staff begin to realize there aren't unlimited funds to pay for things, including bonuses. They come to understand the only way to earn more money is to be more efficient so the company makes more money.
I used to give my roofing company employees a holiday bonus. I had no system for calculating the bonuses, and what I discovered was the money I was handing out made no one happy. My first Christmas after opening the roofing business, I gave one of my five employees a check for $800. He was thrilled. I next gave one of our lead guys, a foreman, a check for $1,000. The foreman ran the crew, brought his own tools and used his own truck. He was surprised and obviously pleased by how much I gave him.
Fifteen minutes later, I overheard the foreman saying to someone else: "I can't believe he thinks I'm only worth $200 more than that other guy!"
But really, what does the holiday season have to do with how big a bonus you give someone? A bonus comes out of profits, and the only way you can afford to give one is if you're pricing things correctly. The way to use bonuses as a management tool is to tie them to performance. To do that, you have to know how each job is performing and how much each job makes. Once you tie bonuses to profitability, employees are motivated to be more efficient.
At my roofing company, Maggio Roofing Co., Takoma Park, Md., we have a profit-sharing program tied to profitability. We hold a monthly meeting where we show employees our sales, revenue, direct costs, variable costs and what we made in profit from year-to-date. This means at the end of the year, there are no surprises. People know from month-to-month how much they will receive in profit sharing come December and why.
A few years ago, we didn't have a great year, and there were no profit-sharing bonuses. That triggered no defections. Everybody knows what we're making, and they also know when we're not making anything.
Mostly, my roofing company hits its goals. That's another reason to open the books. People want to be on a winning team. They want to work for a company that makes money.
Open the books
With unemployment as low as it is, you want to do everything you can to keep and reward people. That end-of-the-year check is an incentive to stay. I pay at the top of the market to attract the best. But I also think what you share with people—a bonus that's based on profitability—goes far toward creating a culture where people will want to work for your company.
To read an article related to this topic, see "Keys to success," August 2014 issue.