Why Your Business Should Be an Open Book

CHICAGO (TheStreet) -- Most small-business owners have an open-door policy. When you've only got a few employees, holing up alone in an executive suite isn't an option. But being truly open about the state of the business is another matter, and when it comes to sensitive financial information -- such as how much your company made (or lost) last year -- owners prefer to keep mum.

Why? A management approach known as "open book" has been gaining popularity by advocating the opposite approach. In its most simplistic form, it means literally opening the books: letting all employees see the company's financial statements, so they know exactly where you stand.

A management approach known as "open book" advocates letting employees see the company's financial statements, then getting them fully involved in ensuring those statements stay in the black.

But shedding the secrecy surrounding profits is just the first step. Having the knowledge is one thing; it's what your employees do with that knowledge that really matters.

Any employee can be taught how to read a balance sheet or profit and loss statement, says Wayne Baker, a professor of management and organizations at the Ross School of Business at the University of Michigan. "If that's all you do, you haven't given people the tools to take action," he says. "Financials don't provide information in a form that's actionable."

Another problem with focusing solely on finances is that you're looking at the past rather than the future. "Financial statements tell you the history of a company, but not where you're going," Baker says. "It's like driving down the street only looking in the rearview mirror."

The father of the open-book movement, Jack Stack, first put the theory into practice as CEO of Springfield Remanufacturing in the early 1980s. (Stack's principles have since been spun off into a coaching and training company, The Great Game of Business). Studies have shown that companies using the approach achieve better performance and productivity compared with those that don't.

As a comprehensive approach, open book management depends on three key principles, all of which have parallels to the sports world (hence, the "game" of business):