Profit sharing vs. profit stealing

CEOs of private, family-owned companies tend to be circumspect about the information they disclose to outsiders. Their family’s business, they reason, is nobody else’s business. Many family business owners decline to divulge their annual revenues—and some won’t even offer a vague description like “low to mid-seven figures.” Indeed, some family CEOs make it a habit never to give a truthful answer to the question, “How’s business?”—that is, unless business happens to be very, very good.

Yet some family business owners are bucking this tradition of secrecy. They’re adopting a strategy known as open-book management, in which a company’s key financial and operational indicators are shared with employees. Why are they revealing data on expenses, or profits as a percentage of revenue? The answer, they say, is simple: Because it works. When staff members understand the numbers that drive their incentive plans, proponents of open-book management assert, the employees stay focused on improving performance, cutting costs and reducing waste. In other words, they start to act like owners. 

A family business owner once told me that before he converted his company to open-book management, he was obligated to pay employee bonuses during a year when his business lost money because the bonus plan was tied to gross revenues, the only figure he had shared with the staff. The open-book system, he said, was “a much better platform to manage the business.”

Yet open-book management isn’t a good fit for every family company. On page 29, Stan Luxenberg outlines the pros and cons.

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In this issue, we also examine the disastrous consequences of allowing an unscrupulous person to manage your accounts payable. As Angela Black reports on page 45, a family business that’s too quick to trust a bookkeeper without instituting a background check or other safeguards is vulnerable to embezzlement. While sharing financial information can increase your profits, ceding financial responsibilities to the wrong person can cause them to disappear. Even if it makes sense to let your staff see your ledger books, make sure you always have an eye on your checkbook.

About the Author(s)

Barbara Spector

Barbara Spector is Family Business Magazine's editor-at-large.


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