Michael Erath teaches employees how money flows through a company by mapping financial categories onto a $100 bill. A simple visual shows where each dollar goes: materials, labor, operating costs, and profit. When labor costs rise or rework happens, profit shrinks fast, helping staff see how their decisions affect the bottom line.
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One of the things I often find, especially founders or entrepreneurs struggle with, is communicating financial information to team members. There's a lot of hesitation. I ran into this in my own business. We were in a situation where we shipped primarily product by the truckload or by the container load. So it was not uncommon to have invoices that might be anywhere from 50 to $100,000. And the caliber of employees we had just didn't really have any financial literacy. Nobody had taught them how money works within a business. And so they would see things like an invoice and a packing list going out of our warehouse, and they would automatically assume that if we sold $100,000 worth of product, somehow I was getting $100,000 worth of cash as a result of that transaction. And. And so one of the things I did to help really kind of break it down and make it simple was I related our financial statements, in terms of the categories on our financial statements, back to $100 bill. So the example that I like to use is I take a. This is a photocopy of a $100 bill. I've enlarged it to be 10 inches wide, and then I get a ruler. And based on the categories of our financial statements and the percentages of revenue, I just start to mark up the dollar. So in this case, on the back of the dollar, I've scored it so that in this example, I've got 25% materials cost and our cost of goods sold, and another 25% direct labor. So in this model, we're operating off of a 50% gross profit. And for the purposes of this exercise, I've got 20% operating expenses, another 20% SGA, leaving 10% profit. And so the way I do the exercise when I'm doing this, when I was doing this in front of my employees, the way I would encourage you to do it is. Is I start by just saying for every $100 that we sell within our business, what you need to understand is that we had to buy the materials that we used to make what we sold. And those materials, if we do everything right, cost us 25 of those hundred dollars. So this is not money we keep. This is money we've already spent that had to go to pay vendors for the materials that we used. Then we have to pay everybody's paper payroll and benefits that's involved in making our product or delivering our services. And in our case, that's another 25 of the hundred dollars. So I'll cut away another 25% based on that score so that's what's left over. And I'll explain just very simply and high level the concept of gross profit and cost of sales and how that works. But we also have operating expenses. And so I'll just kind of at a high level, I'll explain what some examples of operating expenses are and how these are the expenses we have to pay for supporting staff and people and expenses that aren't directly related to the product we're making or the service we're providing, but it's all of the support for that. And in our case, that's another 20 of every hundred dollars is being spent on those operating expenses. So this is what's left over. And we still have what's called our selling and general administrative, or in many cases just general administrative expenses. So I'll explain what some of those things are. And in this case, this example, that's 20 of those $100 goes towards those expenses. So after we've paid for all of these things, this is what's left. There's essentially $10 left of this $100 bill and that's what we call our profit. But what you have to think about is of the $10 that's left, we've got to pay taxes on that. So with our state taxes and our federal taxes and all the other taxes we're paying, we're going to now lose another, say 40% of that. So now we're down to this is all that's left of the $100 that we sold. It's basically in this example, that would be about $6. So that's essentially the profit. And as I said, that's if we do everything else correctly. Now with the $6 that's left, we want new equipment, we want to be reinvesting in the company, we want new software products, we want things to make our jobs easier. So as an organization, we, we have to make a decision to reinvest some of that profit back in the business. So even if we take half of that profit and reinvest it back in the business, we are now down to $3 of that hundred dollars we sold left. This is all that's left over at the end of the day. And that's if we do everything well. And so what I'll do from there, because again, that's the example of in a perfect world, if we don't make any mistakes and have to rework things, if we don't damage any product, if our efficiencies are there from a labor perspective, that's how it Works out. So another example I'll do is I'll take the same, the same dollar, and I've scored it a little bit differently. So I'll talk through the example. And okay, We've got our 25% materials, but we were actually really inefficient with how we utilized our direct labor. We didn't hit our productivity goals and, and we ended up instead of $25, we spent $30 on direct labor because of our inefficiencies. We still have $20 that we have to cover for operating expenses. We still have 20 for our SGA and our overheads, but now we're down to only $5 left over because of the inefficiencies with our labor and our low productivity. So we still have to pay taxes on that. Now. There's less money leftover as a result. And then the third example that I'll walk people through is, what if we have our 25% materials cost? So we cut that away and our labor efficiency, we reach our labor efficiency goals, and so we're still at 25 of those dollars in direct labor. But we mismanufactured the product or we created a problem with the service. And so now we have to remanufacture something or we have to go back and re perform the work to provide the service. And that costs us another $30 to go back and do that. So now we're down to 30 of those hundred dollars left over. We've still got our $20 of operating expense, so that leaves us with $10. But we still have $20 to cover SGA. So with only 10 remaining, that means we're $10 short. And so what happens is, if the company has cash and resources, the company has to cover that $10 deficit. If the company doesn't, sometimes the owners have to write a check back to the business to cover that deficit. So by doing this and by breaking it down to $100 bill, what I tend to find is people can relate to that. $100 is very relatable. Whereas all of the big numbers that are on our financial statements, especially for employees or team members who've never had anybody explain financial literacy to them, those numbers are overwhelming. It's difficult to make heads or tails of that. When you take your financials and how money flows through your business and break it down to $100 bill, it becomes very easy for people to digest and much easier to explain. And I find that when we do that, it starts to create more of a common playing field or a level playing field for people to understand how this works and help you coach people more and more to see how their role and the things that they do contribute to either protecting or eroding what little bit of money and profit is left over at the end of that equation.
