Financial | Business Solutions

Seven Easy Steps to Failure

Normalization of Deviance: How to Lose Your Business

Failure is insidious even for the smartest and brightest entrepreneurs. It sneaks up wearing a cloak of invisibility woven from the gradual acceptance of what used to be unacceptable. That is the normalization of deviance. Here are seven examples from society and business. It has never been easier to destroy your business so why wait? Here are seven easy steps and one bonus suggestion.

Remove performance standards & Incentivize lassitude. Yes, it has been difficult with over two years of government lockdowns. A virtual workforce based at home has been a winner for some businesses but others are suffering from employees who have essentially retired on the job with quiet quitting. Every low performer you tolerate sets a new low standard for everyone to emulate. Each now low becomes the benchmark to follow; straight to failure. Poor performers can drag down ten peers. A non-performing employee will change your business culture whether you like it or not.

Suggestions: Measure performance and clean house. Eliminate mediocrity as quickly as possible. It is sometimes easier to change people than it is to change people. Reconfigure your staff. Hire slow and fire fast. Adjust your people, process, equipment, product and/or hours to handle vacancies. Consider hiring older people or others you might not have included in the past. They just might surprise you with their work ethic and knowledge.
Spend, spend; spend like there is no tomorrow. Cash is fuel for every business. You are out of business when you run out of cash. Now is the time to be careful with your cash and your debt. The business may be past saving if you get to the point where those online offers for easy loans look attractive. Easy money can quickly become a bottomless pit of interest and fees.

Suggestions: Listen to the pessimists in your organization and the market to help you to understand the risk environment and pivot your spending. Listening does not mandate agreement but it will give you new information for better decisions. Listen to what the sales data is telling you to see how your customers are adjusting to this troubled economy.
Deny the facts in favor of the loudest voices. Be an informed consumer of the news. There are highly skilled propagandists out there with big megaphones. Repeating a lie does not make it true. Changing definitions does not change the facts. Listen to both sides with an open mind. Make considered judgments. Be careful of listening to only your own voice.

Suggestions: It helps to talk to trusted advisors and mentors. Be deliberate about checking your position and pivoting if needed. Run SWOT and PEST analyses as tools to help visualize the situation.
Risk it all. Just do it. Business has always been risky. Smart entrepreneurs analyze and manage risk.

Suggestions: Redo your market research and understand your business economics. Develop options and test the riskiest elements of your plan before you bet the ranch on them.
Deny that the rule of law is fundamental to life, families and civilization. It is a fact that civilization and freedom do not exist when the criminals rule the streets. Businesses cannot exist in chaos. Do you really want to live where those in power want to defund civilization?

Suggestions: Talk to the people in power and vote wisely and with your feet if necessary. Consider if it is time to move to a safer location.
Ignore inflation. The truth is that inflation is a killer. It wipes out businesses, jobs and bankrupts families. It destroys dreams and drives people to the bread lines. You are seeing the impact now at home and in your business. Know that this impact will not go away!

Suggestions: Raise your prices faster than your costs. Fire unprofitable products and customers. Apply the principles of profit improvement and look at every aspect of your business.
Cook your books like Enron and Congress. Clever bookkeeping can hide a lot of sins. Resist the temptation to keep massaging your business plans and forecasts until you get the numbers that you want. Reality wins.

Suggestions: Start with a blank piece of paper to create a new business plan.
BONUS: Deny that the American Constitutional Federal Republic and Capitalism work for society by creating jobs that raise us all up. Your job and your business depend on this as the very foundation of freedom.

Suggestions: Celebrate this great nation and work every day to make America great. Save your business and the jobs of the people who depend on you to continue to do the right things for the greater good.

Thank you to the work that you are doing to create and sustain jobs; even your own.

References:

JK Pinto – International journal of project management, 2014 – Elsevier

https://tinyurl.com/2p89x6pz

J Albright – Business & commercial aviation, 2017 – code7700.com

https://code7700.com/pdfs/bca/bca_normalization_of_deviance_2017-01.pdf

MG Everson, BA Wilbanks, RR Boust – AANA journal, 2020 – researchgate.net

https://tinyurl.com/4hdyrh36

K Davis, JK Pinto – IEEE Transactions on Engineering …, 2022 – ieeexplore.ieee.org

https://dspace.lib.cranfield.ac.uk/bitstream/handle/1826/18178/corruption_of_project_governance-2022.pdf?sequence=1&isAllowed=y

S SCOTT – 2021 – starlingtrust.com

https://starlingtrust.com/couch/uploads/file/the-normalization-of-deviance-starling.pdf

False Savings: How Improvement Program Expectations Lead to Disappointment

The current complaint with Six-Sigma Programs, Lean and other cost reduction and business improvement programs is that after a while the increased profits and reduced costs that were promised have either not materialized or have disappeared. A group of business improvement champions for a major global business recently told me that after ten years of effort they realized that the cost reductions and profit improvements predicted by Six Sigma projects were not sustainable. They gave a number of reasons given including a lack of hourly worker involvement and a lack of buy-in and their new corporate initiative goes a long way toward addressing those problems. These are probably true but I think there is much more to it.

One of the fundamental problems behind improvement programs of any kind is the inherent need to exaggerate the size of the anticipated improvement. I submit to you that this need to exaggerate is not only personal but corporate. The following sequence leads inevitably to backsliding down the slipper slope of reality.

Consider, for example, a Six-Sigma black belt. The company pays up to $60,000 to get the black belt trained and then tells them quite clearly that they have 12 months to generate $1 million in improvements to justify the investment. That becomes the objective against which their job performance will be measured. Pressure.

Now consider a department manager or business unit manager who has several black belts working for them. Yes, they now have several million dollars of improvements as part of their job performance criteria.

And so it goes up the ladder from the lowest to the highest levels of the company. Having spent hundreds of thousands of dollars to millions of dollars to implement this improvement program, progress against these goals is a constant item at the board meeting. “Don’t disappoint us now” is the top management mantra. Every bonus in the company rides, in part, on program success.

So, perhaps insidiously at first, the temptation to exaggerate creeps into the improvement estimates. The best of the forecasts are given and the downsides are brushed under the rug. Pressure is applied for success and even the round peg will fit into a square hole for a while. At some point some people just “game the system” to make the numbers.

The net result is that some projects succeed phenomenally, others succeed a bit, others fail a bit and still others fail phenomenally. The improvement program becomes a huge waste of resources and delivers ever-disappointing results.

The bottom line is that yes, you can have fatal structural flaws in your improvement programs such as a failure to engage and involve key people but in the end, no matter how well your program is designed, if you set unreasonable expectations, offer unreasonable rewards or penalties and do not scrutinize proposals with a very critical eye toward reality, you will end up creating a disappointment.

Do not fall into that trap. Make sure that every project you undertake for profit improvement is thoroughly analyzed by your accounting team to insure that the projected savings are real. Test your savings IQ with this short quiz.

Who is Stealing Your Profits

The question for you is not “if” your profits are being stolen but the only question is “Who is stealing how much?”

The estimate of embezzlement for the US alone in 2018 was almost $50 billion. This included robbery, cargo theft, larceny and burglary. The top incidents were organized retail crime, employee theft, fraud, burglary, counterfeiting and robbery. Note that employee theft far exceeded the losses due to robbery. In a 2017 survey by Hiscox* the median dollar amount for small or mid-sized businesses (under 500 employees) was $289,864. The median loss for companies with over 500 employees was estimated to be $452,025.

Hiscok provides the following common characteristics to look out for:

Intelligent and curious – eager to know how everything in the office works
Extravagant – often flaunt their wealth
Egotistical risk-taker – rule breaker on and off the job
Diligent and ambitious – beware of the person who does not take vacations
Disgruntled – feel treated unfairly and may want to even the score

I’ll add one more from experience: They are the manager, accountant, controller, bookkeeper or clerk who just can’t get the reports straight and on time. They love disorder in which to hide their own dealings.

According to the National Retail Federation retail goods shrinkage of $48.9 billion is due to four major sources: employee theft (30%), shoplifting (36.5%), administrative error (21.3%), vendor fraud/error (5.4%) and unknown loss (6.8%).**

None of these figures include the billions of dollars lost to employee time that is deliberately wasted, time card falsification, inflated expense accounts, office supplies that end up at home and countless other ways in which employees waste company time and money. Excuse me while I check my FB account…

A number of years ago a senior sales executive (over 25 years with the company) warned me not to make him work from home because he assured me that he would extract the “cost” from the company in any number of ways that the company could never detect. I was no longer with that company when that move was finally made to save money so I don’t know how much, if any, this long-term employee extracted in “payment.” I often wondered which of his supervisors allowed him to harbor such a terrible attitude.

Just within this year two priests in my city have been indicted for embezzling hundreds of thousands of dollars from their churches. Prevention is a wise thing to do and don’t forget to help keep your employees honest with good systems and audits while you are locking the front door. Embezzlement and shrinkage is just two aspects of the element of Loss which is part of the Profit Equation.

How much of your hard-earned profits can you afford to allow the thieves within and outside your business to take?

References:

*THE 2017 HISCOX Embezzlement Study

** 2017 National Retail Security Survey

Seven Symptoms of Costly Chaos

The president sat in his high backed chair behind a desk piled high with files and a credenza spilling off onto the floor. “Steve,” he said, “I just don’t understand why we are not making money. Cash is running out the door. What can we do?” The phone rang and he yelled at the person on the other end for about two minutes before abruptly hanging up. He then told me that he was about to fire the caller because even after 10 years they just could not get the orders right. “He’s my problem, him and the other fools that I have hired.”

I asked the president what system they were using to track orders. He showed me a computer program that was functionally obsolete. It did not track order details from inception to completion. It failed to communicate the critical information needed by the dozens of people involved in the process. They were supposed to “know what to do” from past practice. It did not integrate with the accounting system or the inventory system.

When asked why he had not upgraded to an integrated system he said that it cost too much money and would be a distraction to implement. Couldn’t I see that they were too busy? His people did not need systems and training; they needed to pay attention to the details and do their jobs.

Here are seven of the symptoms of chaos that indicate you might be paying too little for your systems, management, training and other methods of chaos reduction:

1) Piles of papers where they don’t belong
2) Quality problems
3) Disorder in the office and in the plant
4) Surplus materials accumulating
5) A frequent need for troubleshooting and problem solving
6) Safety problems and/or accidents
7) You do not have an effective continuous improvement process

A continuous improvement process like the Profit Improvement Process engages the entire team in making order out of chaos and putting cash back into the company where it belongs.

PS: I left this president in his office when he started yelling out the door at another incompetent employee about another mistake. He seems content to be paying the price of chaos. I estimate they’ll last another year at this pace. Then chaos will win.

Don’t let chaos beat you.

Save Money on Fees

The other questions to ask your financial people and your bankers are what hidden fees are you paying and what hidden costs are you incurring. These show up in the form of minimum account balances, accounts that don’t earn interest and quite often in lower than market interest rates earned.

How much are you spending on bank fees? It could easily be hundreds to thousands of dollars annually. Even if you think it is zero how much do you think you are paying in hidden fees?

This can be a tough one to answer so you might want to pass this one on to your company bookkeeper or controller.

We all know about the usual highly visible fees such as those associated with minimum deposits, check processing fees, account maintenance fees, returned check fees and on and on. What you may not be aware of, however, is the fact that banks are continuously adding new fees to try to bolster their profits. The easiest approach might be to have someone sit down with representatives from your banks and ask them to explain what fees you have paid in the last 6 to 12 months and how to reduce them.

Reconcile Now or Lose Big

Small businesses with small accounting departments are especially vulnerable to fraud and theft so it is wise to use this powerful and inexpensive tool. Oh yes, it is absolutely necessary that someone you trust do the reconciliations.

A local law office reported that they lost well over $600,000 to embezzlement by their bookkeeper over a 5 year period. The perpetrator was caught, convicted and sentenced to jail for up to 4 years and to pay restitution of $400 per month for 16 years ($76,800).

Once you look for them, you will see that the news feeds are filled with similar stories of embezzlement and the miss-use of funds.

There are two primary reasons for reconciling your bank accounts every time a statement comes out.

The reconciliation allows you to maintain the accuracy of your accounting records and those of the bank. The sooner an error is caught, the easier it is to correct.
A bank reconciliation is an opportunity to detect fraud and theft.

Either of these reasons should be adequate so don’t let reconciliations fall through the cracks. Small businesses with small accounting departments are especially vulnerable to fraud and theft so it is wise to use this powerful and inexpensive tool. Oh yes, it is absolutely necessary that someone you trust do the reconciliations.

Accounts Receivable as a Loss

Two companies I worked with, for example, were able to take steps to recapture $150,000 and $900,000 per year respectively by being more aggressive with accounts receivable, more selective with credit limits and by monitoring and managing cash as a “business” within the business.

How much money are you losing by giving interest free loans to your customers – $150,000 to $900,000 per year? This is a valid target for cost reduction and profit improvement.

Take a quick look at the accounts receivable line on your balance sheet. What is that amount? Now look at the line item(s) on your financial reports that capture your interest payments. Do the math to calculate what your borrowing costs are to carry the amount you are loaning to your customers.

Stop the Losses

Stopping losses is often as important as finding improvements – especially in a worsening business climate such. Your sales and credit departments are going to come into conflict over this matter so it is going to take strong management leadership to make the right decisions.

“We’d been doing business with Samssco for about 15 years and they were an important customer to us. We held their hands and were patient with them over the years when they were late making payments off and on over the years. I’d call Sam, he’d tell me what was going on and we’d ship him more product and wait. He’d always pay us. We got a really large order from Samssco – almost twice the normal size but they were already late on the last payment. I called Sam but he wasn’t available. That worried me so I asked our shipping department not to ship. I called Sam again and had to leave a message. Two weeks later I learned that Samssco had filed for bankruptcy. I was devastated. I thought Sam was a friend. We lost over $25,000 but if I had let the last shipment go it would have been over $75,000 and we would have been in trouble along with Sam.”

Revenue may be nice but sales that are written off are far more than lost revenue when they eat the profits from other sales! Make sure you understand the credit health of your customers at all times and don’t rely on sales people to make the credit judgments that you need a financial professional to make. You’ll save yourself a lot of tension and morale in the sales force and probably a lot of money in the long run. How large is your reserve for such losses? In what ways could you reduce it?

Here are six warning signs that may indicate credit trouble ahead before a meaningful change shows up in their credit rating – which you should be monitoring in any case.

Credit Warning Signs

1. Delays in payments. This is an obvious sign and your accounts receivable system should be set up to monitor and report on this on a continuous basis. Make sure you have a team of managers who are in the loop so they can see this and any of these other warning signs and take action quickly.

2. Changes in ordering patterns. The first sign may be a slowing in order volume. This is usually an indication that your customer is experiencing a slowdown in their business. The last sign may be a surprise order of a much larger size than usual. This could indicate that your customer is trying to stock up in advance of getting cut off.

3. Communication problems. You or your staff may have more trouble than usual getting through to your contacts at the company that owes you money. This is especially worrisome when the usual channels of communication for following up on open invoices suddenly slow down.

4. Pressuring the sales force. Your sales force might start getting pressured to make sales in spite of existing credit limits. This is the time to advise your sales team to keep their eyes and ears open for any signs of trouble at the customer or changes in the market.

5. The business sector is in trouble. Know which sectors your customers service directly and indirectly. Remember that that business slow-downs trickle down.

6. The grape vine is humming. Keep your ears open for those tidbits of information that are known to make their way through the industry. Ask all of your people who are in the field or talk to people in the industry to pass on information for the good of the company. Use any “casual” information legally and responsibly and only with appropriate verification.

Manage your credit risk deliberately

It is very costly to write off bad debt because you not only lose the profit on the original sales (if derived from sales) but you also have to make additional sales to cover the cost of sales just to break even.

Profit Improvement

Bad debt is a profit killer. A good profit improvement process invariably includes measures to reduce losses. Don’t give your profits away.

Paper Losses

A typical office may have anywhere from 4 to 20 different types and brands of paper in its inventory at any one time. This may not seem to be a significant issue but paper costs anywhere from $0.006 (low-end standard copy paper) to $1.00 (fancy letterhead) or more per sheet when all costs are included.

An analysis for one organization found that the lack of standardized purchasing allowed them to spend about $85,000 each year in extra costs just for copy paper. We conducted the analysis in this manner:

-Examine purchasing invoices for copy paper

-Tabulate the costs paid for each quantity

-Calculate the savings possible if the lowest cost supplier had been used

The recommendations were to centralize purchasing decisions and to communicate standardized purchasing procedures to those people who managed the paper inventories at dispersed locations.

The analysis did not determine how much could have been saved if less paper had been used but the qualitative judgment was that the savings could have exceeded the purchasing savings.

Paper losses like these are an indicator of even deeper loss of control over expenses.

Wasting Money on Space

Space is an asset until it is no longer producing adequate income. Then it becomes an anchor on profits. Remember that the costs of using space go far beyond rent, lease payments, mortgages, taxes and utilities. Here are four steps to take to see if you can reduce your space costs:

Dig deep and find out what the true cost of ownership is for every space you have.
Review how productive each space is for your business. How much revenue does it support or generate? Retail space is usually measured in revenue per unit space (e.g. $/square foot).
Ask yourself what would happen if we reduced or eliminated this space?
Once you know the answers to #3, see if you can eliminate the space, reduce the space or put it to other productive uses.

One of our clients that did this reduced costs by $95,000 per year and then sold an entire building for a significant profit.