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The $100 P&L Education Exercise

One of the issues in business is that your employees think you make a lot more money than you actually do.  They see the revenue side of the equation and probably think that your revenues are greater than they are.  More damagingly, they don’t see your costs clearly and almost certainly underestimate what it costs you to run the business.

This is hardly surprising as many business owners, in my experience, are surprised by the growth in expenses.  When revisions to P&L statements are made, the expenses always seem to be higher and it’s almost although they breed at night when no one is watching.  It’s no wonder that employees, who are even less versed in this, have a skewed view of costs.

The reasons why this is a problem is more fully addressed in the article Employee Financial Education, and one way to address the problem is to give them a strong visual of the real expense profile of the business.

The $100 in Dollar Bills Exercise is a very effective way to do this and it works as follows:

  • Identify the opinion formers and set up a meeting round a conference table
  • Put a stack of 100 $1 bills and put them in the middle of the table
  • Give everybody sitting around the table a card with an expense written on it
  • In preparing these cards, go through your P&L and find as many significant expense lines as you can
  • These will obviously be materials, payroll, rent, utilities, etc. but be sure to include items they probably don’t even realize you have. These will be items like employer portion of payroll taxes, fees for running payroll, 401k admin expenses, etc.
  • Depending on how complicated you want to get with this, you can also put in a card for depreciation and explain how you pay for assets you need to operate the business and expense them over their useful life.
  • In the top right corner put the percentage of revenues that each card represents in red
  • At the meeting, starting with the biggest expense (usually payroll) have each card holder in turn take the number of dollar bills that corresponds with their red number.
  • When you get to the number for earnings before tax and interest, produce two additional cards which indicate how much has to be taken out for each of these. The dramatic effect is to have someone come in from the outside to collect the relevant dollar bills for these items
  • Finally, you can address the issue of Return on Capital. The concept is that you invested x dollars into the business both when you started and over time as it grew. If you had invested this money somewhere else instead, then you would have generated a market return that reflects the risk of the investment.

For most businesses, there are very few dollar bills left on the table at this point, and this exercise really drives home the impact of expenses.  It is an eye-opening experience for employees, and a good way to show expenses visually without having to disclose any confidential information.