Financial Literacy’s Impact on Organizational Performance

In today's dynamic business landscape, where organizations are constantly striving for growth and sustainability, the importance of financial literacy among employees cannot be overstated. From understanding basic financial terms to grasping fundamental mathematical concepts, employees equipped with financial knowledge (and who monitor financials regularly) play a crucial role in driving accountability and performance aligned with the company's overarching objectives.

Financial Literacy for All

Financial literacy goes beyond just knowing how to balance a checkbook; it encompasses a range of skills and knowledge that enable individuals to make informed decisions about their finances. In a business setting, this translates into understanding key financial metrics and concepts that drive business success. For the green industry, the ability to understand and calculate measures such as gross margin percentage, production efficiency percentage, and gross profit per hour are key concepts for the organization’s managers and leaders.

By educating employees on the meaning of financial terms like gross margin and how they are calculated, organizations empower them to connect their day-to-day actions and decisions with the company's financial health. When employees understand how their work contributes to the company's bottom line, they are more likely to take ownership of their responsibilities and strive for excellence in their roles, a key concept in aligning and driving specific performance through accountability.

How Financial Literacy Fosters Accountability

Accountability is more than an industry buzzword—it is a key concept in every business, whether a single proprietorship producing $100k annually or a multi-million dollar corporation.

What gets measured, as the saying goes, gets done. Financial literacy fosters a culture of accountability within the organization by elevating employees’ awareness of the financial implications of their actions, and making them more inclined to make prudent decisions that benefit the company. For example, a production manager who understands the concept of gross margin will focus on crew efficiency metrics like actual vs bid hours for contracts and employee overtime, thereby controlling costs and maximizing gross margin.

Furthermore, financial literacy enables employees to set realistic goals and targets aligned with the company's financial objectives. Armed with a deeper understanding of financial metrics, employees can identify areas for improvement and implement strategies to enhance efficiency and effectiveness in their respective roles. This proactive approach not only drives individual performance but also contributes to the overall success of the organization

In addition, financial literacy empowers employees to participate more effectively in strategic discussions and decision-making processes. When employees are well-versed in financial terms and concepts, they can provide valuable insights and perspectives that contribute to the formulation of sound business strategies based on their understanding of how their own responsibilities impact the overall financial health of the organization. This inclusive approach ensures that decisions are made with a comprehensive understanding of their financial implications, leading to more informed and strategic choices.

Simply put, financial literacy promotes an elevated sense of ownership and responsibility among employees. When individuals understand the financial impact of their decisions, they are more likely to take ownership of their performance and outcomes. This sense of accountability drives employees to strive for excellence and continuously seek opportunities for growth and improvement.

Financial Literacy Lexicon

Here are a few key financial terms that every manager should know and be able to calculate:

Total Direct Costs (usually called Cost of Goods Sold)

The total of all direct costs required to complete the scope of work. A direct cost is a cost of production related to a specific job, such as labor cost or material used on a specific job. It is important because if direct costs are out of line, it means the job will be less profitable than expected, whereas jobs with excellent cost management will be more profitable than expected.

Calculation: Direct Labor +  Direct Materials + Direct Equipment + Direct Subcontract + Other Direct Costs

Total Direct Cost %

The percentage of Total Revenue required to produce the scope of work.

Calculation: Total Direct Costs / Total Revenue

Total Direct Labor %

The Labor percentage of Total Revenue required to produce the scope of work. It is important because knowing whether labor costs are on track versus bid is a critical element of production performance.

Calculation: Direct Labor Cost / Total Revenue

Gross Margin $ (sometimes called gross profit)

The amount of total revenue left after all direct job costs – direct labor, material, equipment, subcontract and any other direct costs - have been subtracted from total revenue. It is important because Gross Margin dollars are used to pay for Indirect Expenses, Vehicle and Equipment Overhead Expenses, General and Administrative Expenses. Whatever is left over (in general) is Net Operating Income.

Calculation: Gross Margin = Total Revenue – Total Direct Cost

Gross Margin %

The percentage of total revenue remaining after all direct costs have been subtracted.

Calculation: (Total Revenue - Total Direct Costs) / Total Revenue; an alternative calculation is 1 - Total Direct Cost %

Production Efficiency

The percentage of actual production hours used in relation to the production hours that were bid for a scope of work, literally how efficiently production hours are used to perform the scope of work. Results less than 100% indicate greater efficiency than bid, while results greater than 100% indicate some level of inefficiency relative to bid. It is important because the biggest controllable cost of any scope of work is the labor component. The more efficiently work is performed, the lower the overall direct cost and the higher the Gross Margin. The less efficiently work is performed, the higher the overall direct cost and the lower the Gross Margin.

Calculation: (Actual Hours / Bid Hours)

Gross Profit per Hour

This is a measure of production efficiency that shows the hourly Gross Margin amount produced by every hour of labor used to complete a scope of work. It is important because it can, over time, be used as a predictor of production efficiency and point out a company’s or operating division’s areas of proficiency and opportunity.

Calculation: Gross Margin $ / Total Production Hours

Other Financial Literacy Metrics

There are many more financial terms and benchmarks that will help improve the financial literacy and accountability of employees, including:

• Indirect Expenses
• Vehicle and Equipment Overhead Expenses
• Net Contribution Margin
• General and Administrative Expenses
• Net Operating Income

Encouraging employees to dig deeper for the meaning of these types of terms and their importance to the organization, and discussing how they may be able to impact each of these in their own roles, is a good next step to improving your own organization’s financial health and accountability.

Ultimately, the importance of financial literacy in the workplace cannot be overstated. From understanding basic financial terms to grasping fundamental mathematical concepts, employees equipped with financial knowledge play a crucial role in driving accountability and performance aligned with the company's overall objectives. By investing in financial education and fostering a culture of financial literacy, organizations can empower their employees to make informed decisions, drive business success, and achieve sustainable growth in today's competitive business environment.