WHEN COMPLACENCY SETS IN

• October 5, 2023
• DigitalBoost
• no comments

“Enlist People Who Maximize and Magnify your Energy.” (John C. Maxwell)

A basic building block to the foundation of your business. It reduces the risk of both erroneous and inappropriate actions. Risk is a reality. It can cause you financial loss and damage to your business beyond repair. The key is to identify which risk applies to your specific business model and which factors, either internal or external, could cause fundamental change to the type of risk. If your aim is to boost the value of your business, then I urge you to consider this topic seriously.

Risk is inherent everywhere, from Hollywood to Silicon Valley, in listed and unlisted companies, and is most certainly prevalent in South Africa, due to the incredibly challenging trading environment. Regardless of whether you have control systems in place that you have confidence in, this article will showcase the fact that staff can be or may be inclined to take a short cut or to simply bend the rules to suite their own motivation.

The Dangers of Comfortable Relationships

I have often encountered breach of policy by those staff members who have worked for the company for extended periods of time, or stated differently, for too long. This is a result of ‘comfortable’ relationships that form internally between the owner and the team. There is not one entity that is the same or has the same risk profile or risk appetite. Every company has its individual blueprint.  It is necessary to constantly adapt your risk profile to accommodate external and internal factors. 

In essence, no one person should have sole control over the lifespan of a transaction – as an example, one person should not open the account, invoice the customer, earn the commission, pass the credit note, collect the money, and sign off month-end reports. The situation that I have just explained to you is a huge risk prevalent predominantly with entrepreneurs, although I have also been witness to certain instances of malpractice in the corporate world as well as in well-established businesses.

Regarding entrepreneurs, and in instances where they have insufficient capital to upscale their staff compliment to correlate with growth of turnover, it is during this period that bad practices and vulnerabilities are commonplace. During the process mapping stage, I often ask the question “why do you do that”? – to receive the answer “it’s the way things have been done here for twenty years”.  Incorrect and inefficient practices that are passed down from generation to generation which are defunct for many reasons.

In line with my brand promise to you, and to drive the reality of this problem practically, I will showcase real life examples of lack of controls in different environments.

Consider the instance where a company employs a husband-and-wife team. The wife works in administration and the husband is in sales.  The sales commission aspect can drive many unintended consequences in such a scenario. Obviously the the wife referred all sales leads to her husband. This caused animosity among the rest of the sales team.  To drive personal income, the wife recklessly opened accounts extending credit. Apart from the devastating effects that this process, which had been ongoing for many years, had on the wealth of the company, the sales rep now did not need to be a hunter – he merely was processing sales and earning high commission – life was great! I changed the system and established an internal sales desk which was not driven by commission. I implemented reports to measure not only the gross profit earned but also the net profit- yes, net profit on sizeable accounts. This company’s product price was influenced by forex fluctuations and required the costing system to be updated constantly. The result was that both sales and margins improved, as well as the morale of the team.

Also consider an administration lady running a company in which the owner is absent. The nature of the business was a retail store, drawing stock from a central warehouse. The owner was satisfied with turnover and gross profit margins. I was consulted when the owner got wind of the fact that something was amiss.  I discovered that stock and money were missing. The admin lady employed a methodology that went undetected, by anyone. She would draw stock at different times from the warehouse using one invoice multiple times, which invoice spanned over different financial periods. I am sure that by now you are thinking, “why did the stock controller not do something about it”? Well, he simply was not passionate about his work. Over R2 million was lost over one financial period.

A while back I conducted investment decisions for a Venture Capitalist. I was provided with ten companies to assess for investment purposes. These companies were predominantly those who were on the brink of bankruptcy. Upon me giving the client a thumbs up, they would purchase the business. I identified a panel beating business that showed promise and was impressed with their innovative technology and well-structured workshops. After analysis of the business and by reworking their financials for a two-year period, I was satisfied that this was a good investment, and my client completed the deal. Six weeks later the company was sold onto a listed car rental company for a profit of R75 mill. It was unfortunate for the owner of the panel beating business to lose such value in his business, as he never realized the value thereof as he employed a bookkeeper instead of a qualified accountant. The bookkeeper was incorrectly allocating personal expense items (which were vast) to trading costs and not to the Directors remuneration account, which significantly devalued the company. It was a great deal for my client, but a terrible loss for the owner. Had I been acting for the panel beater; I would have done things differently. I would have done the above, but also revalued the business based on earnings potential and not on the perceived value.

I worked with a company who had a hybrid business model of renting construction equipment. Their branches were spread across South Africa and some into Africa. Despite the most planned controls that the CFO had implemented, there were still certain risk gaps inherent in the business practices. One that I identified was that certain site managers were not recording income earned, stating that equipment was not on hire, whereas and in fact, equipment was on hire. I ascertained this by comparing breakdown reports to the fleet ‘not on hire’. This resulted in financial loss to the company.

Key tip: 

When staff are reluctant to take leave and when there is a lack of cooperation or unwillingness to work with authority, then dig deep. The chances are that something inappropriate is taking place. We would like to believe that staff are so committed to their jobs that they do not want to take a holiday. Sadly, this is not always the case.

Last example: A factory supervisor operated in a manufacturing environment which had constrained capacity which resulted in bottlenecks with delivery. The supervisor earned sales commission on certain accounts. What transpired is that he prioritized his client’s orders for production – to the detriment of the rest of the team. Not only was the culture of the sales team significantly altered, but the company lost customers and profit.

I urge you to read my blog called Respect Your Sales Team. I stated at the beginning of this article that risk is different in every organization, and I hope that the examples above showcase this reality. Dr Myles Munroe makes a salient point in his book ‘The Power of Vision’, when he states: “Eyes that look are common, but eyes that see are rare”. From my experience, I hold the belief that “you do not know what you do not know”. The solution is to recognize the fact that there is somebody out there does who does have the skill to assist you to guide your company to the future.

I am a firm proponent of the concept of creating centers of excellence where all departments work towards the same goals to drive company profits and culture. Often breach of controls result in knee jerk reactions which in turn drive implementation of duplicitous and unnecessary controls, which result in bottlenecks in the business. As I always suggest, consult with a business consultant who will guide you through this process as they should have an unbiased, fresh, and open approach.

I hope that this article inspires you to take a fresh look at your business. 

Thank you for reading this blog. Stay tuned for more insightful discussions on boosting your business’s success. Join us next week, and let’s keep growing together!