Who in my company should understand the financial statements?
Finance & Capital mentor Stephen King responds:
Every employee should understand a company's financial goals and the related financial statements. However, this is usually not the case. Management has traditionally hesitated to share budgets and financial results with employees. Financial results are usually on a very controlled "need to know" basis. While dissemination of financial information is more prevalent in public companies -- if for no other reason than the employees can access public reports via the Internet or other sources -- information sharing is still not as widespread as one would expect.
In general, employees cannot help the CEO achieve financial goals unless they have some understanding of those financial categories they can affect directly. Basically, employees need to know how their "piece of the pie" fits into the company's overall financial picture. For example, in a service environment, where time and materials are the source of revenue, sales and project managers cannot help the CEO achieve the budget unless they know what sales and billing targets they have on a monthly and annual basis and how those targets affect other key financial results.
Lack of communication affects the entire organization. Lower sales for the month can have implications for cash flow, debt covenants, and company expansion plans. If the employees in accounts receivable know not only how much you want them to collect for the month, but also the actual cash balance targets and balance sheet implications, they will understand why the chief financial officer is pushing so hard to "hit a number." When cash is tight, a planned marketing program in two months may depend on what sales are made next month and what accounts receivable are collected the following month (when payment for the marketing brochures is due).
At the companywide level, tying bonus compensation to the company's financial performance is a popular and effective way to get the entire organization working toward achieving the company's budgeted income, cash flow, and balance sheet goals. Bonuses can also be at the department level if good reporting is available.
Management should not be afraid to share company information with staff. If you're concerned about disclosing too much, consider filtering information, depending on its use. Financial goal setting and results reporting, at all levels of the organization, will move the company in the right direction and in unison. This is particularly important in our increasingly competitive business environment.