Jack Perkins is the Founder at CFO Hub, which provides on-demand CFO, Controller, Accounting, and HR services.
Financial transparency is the practice of openly sharing your company’s financials — typically with employees and stakeholders but sometimes with the public. That may sound risky. But there are several surprising advantages for small companies.
Here’s what you need to know to decide whether your business should adopt the strategy.
The Business Advantages of Financial Transparency
For your company to become financially transparent, it’ll need to create and publish regular reports. These should detail metrics like earnings, expenses, salaries, and investments.
Sharing this kind of information consistently can become a competitive advantage. It makes your company appear more credible. People won’t just have to trust that you’re doing well. They’ll be able to see it for themselves. That can improve relationships with vendors, partners, and investors. It could also be valuable when applying for loans and business credit lines.
Financial transparency is also good for employees. It helps the average worker understand the company’s decisions better, which can improve morale.
For example, an IT supervisor may be frustrated about not getting the resources their department needs. If your company was financially transparent, they could look at reports to see why the funding hasn’t arrived. That may keep them engaged through a frustrating situation, which might otherwise devolve into complaints and workplace dissatisfaction.
Finally, publishing regular financial transparency reports can help to streamline decision-making. It ensures everyone in the company can access the data they need to make informed choices.
Risks and Challenges
Before covering the steps for reaching financial transparency, it’s worth considering potential downsides. There are two you should know about.
First, sharing your company’s financials widely increases the likelihood of them reaching the public — even if you don’t want that. This could lead to some bad press in a down year. The second risk is that your competitors could get deeper insights into your business. You may accidentally reveal a competitive advantage or show a weakness the market could exploit.
Each business has to weigh these risks against the potential advantages of transparency. But, generally, the pros outweigh the cons for most small businesses.
Steps for Promoting Financial Transparency at Your Company
If you think greater financial transparency is right for your company, the following steps will help you get there.
1. Define Goals and the Data You’ll Share
Start by considering what you hope to achieve with improved transparency. You might want to increase employee engagement or strengthen relationships with partners. The objectives you set can impact the data that goes into your reports.
For example, to improve employee engagement, you might focus on data around salaries, expenses, and company growth. But if you were trying to improve vendor relationships, you could highlight metrics like your company’s financial runway.
You can set multiple goals and share many different types of financial data. It all comes down to what you hope to achieve — with the caveat that any data you share could reach the public.
2. Set a Consistent Reporting Schedule
Next, set a regular schedule for releasing the financial reports you create. Staying consistent is an essential step toward the kind of transparency that builds trust. You could issue reports every:
- Month
- Business quarter
- Half year
- Full-year
Choose the timeline that best aligns with the reasons why you’re pushing for financial transparency. You might also release different reports on each timeline. For example, a short financial highlights email could be enough to meet your monthly reporting goals. Then, you could publish a more detailed report quarterly or semi-annually.
3. Leverage the Right Tools
Next, set up some tools to help you create financial reports more easily. Automated reporting software is perfect for this. For example, your CRM may have a reporting function to create visually detailed financial charts in seconds.
You may also need to partner with a third-party expert during the opening phases of financial transparency. For instance, an outsourced CFO could help your company get on track financially before it starts sharing data with employees and the public.
4. Offer Context
Finally, always present your financial reports with the appropriate context. This helps to soften the blow of bad data and improves transparency.
If macroeconomic conditions hurt your business financially in Q1, put that into your report. It would help to show that the numbers aren’t as bad as they seem. Plus, it shows that you’re doing more than just generating the reports — you’re thinking deeply about the company’s finances. That can make you appear more credible and knowledgeable.
The Bottom Line
When done well, financial transparency can be a secret weapon for a small business. It can increase employee satisfaction, help partners trust you more, and even set the stage for your company to go public eventually. Just make sure you know the risks and potential challenges before proceeding.