Your MSP’s financial situation can be a thorny subject to discuss with employees, especially when it comes to things like salaries. But sharing certain numbers with staff can inspire and motivate, ultimately leading to business growth.
“Usually when businesses are trying to grow, the owners end up doing most of the strategy. They want to hand off some of that authority so they can move onto bigger things, but they do that without handing off the responsibility for driving financial numbers inside the business,” says Brad Schow, the COO of HTG Peer Groups.
He says owners shield staff from the finances because they don’t want employees understanding how much money the business is making. But without insight into the wider financial situation, employees can make incorrect assumptions about how much they’re earning compared to what the owners are pocketing.
And if MSP owners aren’t transparent about the company’s financials, the consequence could be stunted growth, says Schow. “Usually the businesses that get mature enough to understand the financial makeup of their business—and to educate not only the managers but the entire company—are the ones that tend to do better.”
That’s because if staff don’t understand the financial baseline, they can’t make decisions that boost margins or reduce costs.
For example, says Schow, “If you want me to be in charge of the service team and I don’t have access to how much we’re being paid for service or how much we’re spending on service, every time I make a decision I have to get approval from somebody else because I don’t have visibility as to whether we can afford it.”
Creating a culture of financial transparency
In addition to streamlining decision-making, financial transparency can shift employee doubts into a culture of trust.
Being open “gets rid of tension that you should be compensated more. If you go to work every day and you’re thinking, ‘For every hour I get $25 and the owner gets $75. How come I can’t have a raise?’ Eventually that builds and over time, it can be a cultural issue.”
That’s why, once you have open books, it’s vital to educate employees about the meaning behind those financials to avoid misconceptions . “If you’re an average tech and you’re making anywhere from $40,000 to $80,000. If you hear your business is a $5-million company with 10% EBITDA, that’s $500,000 a year in profit. You’re thinking, ‘Well, why can’t I have a $20,000 raise?’”
Through education, employees learn the broader business context. “For a $500,000 business, the payroll alone in that business—if you have a bad month or two—that $500,000 is gone. There’s no profit, and if you don’t have anything in the bank, the owner has to start either getting personal loans or financing to keep the business going himself.”
How to introduce financial transparency
An MSP owner can’t suddenly go from sharing no financials to sharing everything without the risk of employees misunderstanding the numbers. Schow suggests shifting from closed to open books over time by following these steps.
- Owner receives financial education
“Make sure you’re educated on good financials in the IT industry and what that looks like.” He recommends the book The Great Game of Business by Jack Stack and Bo Burlinhgam.
- Pick a good teacher
“Not everybody can communicate in a way that will get people to understand. Whether it’s you or somebody else, find a good teacher.”
- Begin with a small group
“Start with your key leaders and learn how to teach them how to understand this. Then begin to roll it out into the broader company.”
- Don’t tell everyone everything
If given the full book, employees could uncover the salaries of peers and superiors, which isn’t any of their business, says Schow. To avoid this, lump together admin expenses and display each category as a percentage.
Of course, the managerial level should have greater insight. “I would hope managers would have visibility into the salaries of the people that are working for them. But we don’t want to share that level of detail with the entire staff.
“So maybe lump it into the COGS across the entire department, including all tools and payroll, so there’s no way for them to back out their salary and figure out what everyone else is making.”
- Share the important numbers
The most important figures to share with employees are revenue and margin, says Schow. “Your business could lose money because you’re spending too much on rent, cars, and insurance. You can eat up an entire company’s profit even if they’re really great at selling things and delivering service profitably if you’re not watching general and admin expenses.”
Schow says the end result of financial transparency is happier employees and reliable growth. “In general, the more you strategically share financial information, the better your chances of successfully growing your business. The healthier the company is financially, the better everybody feels about working there.
You don’t want to be working for a company that doesn’t look like they’re making money.”