How do you respond when your employees ask, "How are we doing?" If you are like most business owners and managers, you don't open up the books and let the employees see for themselves how the company is doing financially.

Essentially, 100 percent of the highest performing companies do just that, however, says Bruce Merrifield. From the smallest mom-and-pop to the largest mega-corporation, they share all of the numbers with the employees and then make them responsible for achieving results. Merrifield is president of Merrifield Consulting Group, Inc., a management consultant firm in Chapel Hill, N.C., and a well-known speaker.

"Whenever I present, I always ask how many share the numbers. More than 92 percent don't," says Merrifield. "Yet there is a 100 percent correlation of high performance companies and sharing economic results."

He says the key is to share the information and then make the employees accountable for their value per person. This can be determined by dividing gross margin dollars by number of employees within the organization.

It allows management and employees to understand the contribution each person needs to bring to the company to make it successful, says Merrifield. They can also see the positive effects on the bottom line of reducing errors and waste.

"Often, however, the top management will not embrace open book management," says Merrifield. "They often have excuses, denials and blind spots for not sharing the financial information."

He says there are three main categories of objections. The first is the concern that the employees will want raises if they learn how much the company makes, simply are unable to comprehend the numbers, or that by sharing, the executive is giving away a tactical advantage.

"Another reason is the cultural bias that business is just not done that way," says Merrifield. "They say their company has never done it that way, nor have the companies they are familiar with."

Finally there are often personal reasons, he says. They might believe that sharing the information will diminish their leadership power with the employees. Some executives understand the numbers intuitively, but find it difficult to explain their exact definitions and implications to the employees and fear looking foolish, he adds.

To simplify the financial numbers for employees and executives alike, Steve Diest suggests making a performance dashboard by simply putting the financial numbers into a graphic display. Diest is operations practice manager with Indian River Consulting Group in Melbourne, Fla.

"Often there are no clearly defined metrics within a business, so management finds it hard to determine how successful they are at any given moment," says Diest. "But nobody argues how fast a car is really going when they can look at the speedometer."

The problem is coming up with simple, relevant metrics. People tend to manage to what they measure, so it is important to measure the right things, says Diest.

"If you wait to see the results on the bottom line, you've waited too long," says Diest. "It's like driving by looking in the rearview mirror."

Tracking relevant metrics is like keeping your eyes on the road, he says. You can see what is happening and react appropriately.

"It is simple to collect reams of information on business performance," says Diest. "It is harder to boil that down to the key numbers that drive performance and profitability."

Performance tends to go up by about 20 percent simply by involving the organization in measuring it, says Diest. It is like a child in school knowing he will not be graded versus one that is given marks. The one that will be graded is bound to study harder and do better, he says.

"If management follows up and takes appropriate actions, results will be even better," says Diest. "Once you decide upon the essential metrics, don't change them."

They must remain consistent to measure results over time, says Diest. Then everyone can easily see if what they are doing is working.

Distributors need to get over the objections and misconceptions, not just about sharing the numbers, but about what drives profit in an organization, says Merrifield. Most people think sales volume is what drives the value train in an organization.

"But volume is actually the caboose, and it is profitability that is the engine," he says. "Volume is merely vanity, while profit is sanity."

He says to rank top customers by estimated profits instead of sales or margin dollars.

"Profit before interest and taxes per customer is a huge blind spot for many distributors," says Merrifield. "They get killed with small orders. Analyzing customers by PBIT is like mining for gold."

Dividing your customers into groups from the most profitable to the least will also help to better define your precise niche and better service it, says Merrifield. By locating and retaining your most profitable customers, and finding those customers that are outperforming their industry, a distributorship can poise themselves for quicker growth in an economic recovery.

"But to do this effectively, you have to share the numbers so that everyone, from the warehouse to the management, knows your niche and your most profitable, not your biggest, customers," says Merrifield. "When everyone understands the results of their performance with their mind, heart and wallet, you will see positive results."

It also means that you can see which customers to cut, he adds. From a profit perspective, some customers simply don't rate the attention of an outside salesman and the full service offerings of a distributor, even though they might represent significant sales volume.

A five percent pre-tax profit is a good target for most industrial distributors, says Dr. Al Bates. Though it is far from the industry average, he says it's a realistic goal.

Bates is president of Boulder, Colo.-based Profit Planning Group. PPG conducts profitability surveys across more than 30 distribution market segments.

"The profitability typically ranges from two to three percent in a good year," says Bates. "Depending on the segment, it is currently one to two percent with some firms struggling to break even."

You can't manage for bottom line profit or even gross margin or inventory performance, says Diest. You need to drill down deeper and manage the underlying factors that influence these essential metrics.

Diest recommends envisioning metrics as a pyramid. The pinnacle is bottom-line profit. Below that are profit-driving factors like gross margin and inventory performance, which are influenced by other factors.

For instance, inventory performance is not homogeneous and it is more than just stock turns. It involves dead- and slow-moving inventory as well as high-performance inventory. Another useful measure is dollar-weighted inventory performance. These all play into overall performance, says Diest.

Remaining aware of the numbers can help you identify a trend and avoid problems that you otherwise might not have discovered for several quarters, he says.

"It's also useful to measure the closing of new sales, the quote to 'kill' [successful sale] rate, how fast is the quote to bill ratio, sales to investment and gross margin by product line," says Diest. "These will give a true measure of performance and some of the information necessary to make successful decisions."

Employees must at least understand gross margin and expenses as a percent of sales, says Bates.

"I focus on the metrics on the income side," says Bates. "Especially in this slow economy, it is important to measure sales growth."

The slow economy has been difficult for many distributors. One strategy is to wait for the recovery, but experts say that no substantial recovery is on the horizon, and even when it arrives, it is likely to bring only gradual increases in sales.

"The hard fact is that at most distributorships it is necessary to drastically cut the operating expenses," says Bates. "To see results in the short run, you need to get brutal on the expense side and trim them down to where they should be."

This will entail looking at every internal process to find and eliminate waste, he says. It may also mean eliminating some services to certain customers.

"Whatever it takes to get lean and mean," says Bates. "In a distributorship, this comes down to payroll."

It is hard for executives in small distributorships to cut loose any employee, even the ones that are not productive and are unprofitable, says Bates. In small to mid-size organizations, there are often personal bonds with the employees which make it difficult to make cuts when they are necessary.

"Since it is difficult to handle this in an impersonal matter, it is often easier to be open with all of the financial information," says Bates. "Most presidents don't share the company's financial information, so most employees don't have a real sense of the urgency to increase profits."

If the leaders don't communicate the real facts, employees tend to think that the company is making a larger profit than it is. When it comes time to make difficult choices it can help to let the employees share the burden.

"Show them the facts — the income, the expenses and where the profit margin must be," says Bates. "Ask them where the company can save money and cut expenses aside from reducing headcount."

If they have a viable answer, so much the better. Otherwise, they at least understand why the cuts are being made. The bottom line is that opening the books can only help the balance sheet and make your employees more involved in making the business more successful.