Like all CEOs, Jay Goltz was painfully aware of how expenses can whittle away profits. "I'd spend all day looking at bills and think, 'If my employees only knew what it takes to keep this place going," says the president of $10-million Artists' Frame, in Chicago. Meanwhile, he suspected his employees were studying invoices for pricey framing jobs and wondering, "Why aren't we making more money?"
"It occurred to me that employees had no idea what workers' compensation costs or what I spend on advertising or rent," says Goltz. So, he decided to demonstrate the business's cost structure -- in a way that they all would be able to understand.
Goltz gathered his 110 employees for a role-playing session, during which Vice President of Operations Mitch Gabel posed as a customer with a $100 framing job and Goltz represented the company. Using a fistful of oversize dollar bills, Gabel handed over increasing amounts of "cash" as Goltz itemized the expenses that went into attracting the customer and completing the job.
"What do you think our advertising costs?" Goltz asked the employees. "It's $50,000 a year, or about 5% of each job." Gabel relinquished $5. Then he watched his stack of money shrink further as Goltz continued collecting for health insurance, maintenance, rent, materials, labor, the telephone, and so on.
When Goltz was finished, Gabel was left with a paltry $5. "It was easy for employees to see that the difference between making money and losing money is sliver thin," says Goltz. "I wanted them to get perspective on the expenses that aren't obvious to them and to use that information to make better decisions. For an hour's worth of time, I couldn't ask for a better payoff."
Goltz is not the only CEO to find this method of communication effective. Prakash Laufer, CEO of Motherwear, a Northampton, Mass., catalog company, did a similar exercise with employees, starting with an average net sale of $100. Laufer then broke the sale down to show how much of the $100 went to each line item on the company's income statement and how much was left over in pretax and after-tax profits.
In August 1997, when the company had $5 million in sales, Laufer held a meeting to celebrate the fact that, instead of losing $3.23 on that typical $100 sale (the spring 1996 figure), Motherwear had raised it to a profit of $11.23. Laufer attributes that turnaround partly to the original expense breakdown exercise.