FINANCIAL FAILURE - COMMENCES WITH MANAGEMENT

Sir Fed Goodwin - Not the greatest collegiate manager?

A fish rots form its head and so it is with an organisation with poor corporate management. Failures in organisations especially financial failures are rooted in things that went on sometimes years before but were never tackled.  Later the results of earlier inaction manifest themselves in serious corporate problems both in the public and private sectors. Some work by the writer John Argenti seems to back this up to a large degree.

The accounts of failing organisations seem very often to be presented late and also they are often embellished with creative accounting tricks which may render them pretty difficult to interpret

 properly. A failing organisation puts great pressure on the Chief Executive to dress things up in the best way possible to avoid potential embarrassments. John Argenti identified a typical sequence of events, this was ;defects, mistakes and signs and symptoms of failure.

In terms of  Defects the following should be considered;

1. Management: Autocratically run companies are as successful or unsuccessful as their autocratic leader. With a more collegiate management approach there is usually a greater chance to change course. Companies with autocratic leaders usually have passive boards( intentionally so) which hardly ever challenge the course determined by the autocrat. The directors also lack all round business skills to do their jobs effectively. The finance director is usually backward looking - an excellent number cruncher but not good at dealing with future financial challenges. Accountancy systems are weak. Budgetary control is not exercised. Budgets are produced but not followed and targets are ignored or by passed. Basic feeder system reconciliations and bank reconciliations are negelected or are months in arrears.Cash flow collection and forecasting is not properly addressed and the managers do not know what their products actually cost and they have no knowledge of the contribution each product or department is making to the business.

Sounds familiar?

They are also too slow to react to changes in their business environments and greatly suffer as a consequence.

2. Mistakes : According to John Argenti there are only three basic mistakes:

(a) Leverage: The ratio of debt to equity becomes too large and the interest burden and the need to provide for repayments sinks the business.

(b) Over trading: A company grows too quickly and does not have adequate funding sources to meet its future demand growth.

(c) The big project: A project that is too big for the company's skills set and resources will bring it down.

I would add a fourth mistake to this. Failure to predict differing future scenarios and plan for them accordingly even if it means making some painful decisions about products and sometimes people. This can also mean actively planning for change and re-training people as well and introducing new systems.

3. The Symptoms: These can surface some time later but will include deterioration in the traditional accounting ratios of the organisation, creative accounting -this takes on a whole new life e.g.

Very optimistic public statements about the organisation, stocks are overvalued, repairs are capitalised, depreciation charges are underestimated, big projects are delayed, product quality deteriorates, service complaints increase, staff sickness levels rise, staff morale drops and internal rumours fly. From personal experience -- income estimates are greatly embellished and dodgy debtors also make an appearance to bolster income. The latter can be doubtful or even fraudulent.

The behavioural aspects of failure are often as important as the financial one's, however they are seldom addressed until it is too late -- because in may ways they are the roots of financial failure.