The consequences of poor financial management on a business can be devastating.
In business, you need to develop proactive, effective and responsible ways to manage your finances.
It is good to be successful but it is better to remain successful.
The unfolding article is a true story of how poor financial management led to the failure of a group of companies.
So read on.
Type of businesses
The companies that made up the group were founded by a business mogul Chief Jerry.
The chief has an uncommon wisdom of being able to spot viable business opportunities.
For example, he has business interests in the following choice industries:
- Estate development and tourism
Incorporation of the companies
All the companies were duly registered with Corporate Affairs Commission as private limited liability companies.
The chief was the CEO/Managing Director of all the companies.
However, the chief met the requirements of the Companies Act which allowed a minimum of two directors to form a private limited liability company.
His son was a director in all the companies. But he had little or no power to make decisions.
Financial management: Policies
Poor financial management was responsible for the poor performance of all the companies.
For example, the chief:
- made all the financial decisions.
- never sought the suggestion or opinions of his senior employees.
Similarly, he never sought help from financial management experts to find the best solutions to his financial problems.
Financial management: personnel
His poor financial management style also negatively affected the performance of his employees.
Examples of how poor financial management impacted on his employees included:
- There was no job security
- Employees never took annual vacations.
- There were no promotions
- No pay raises for deserving employees
- Workers were owed several months of unpaid salaries
- Employees were paid salaries that were far less than what they were worth.
- Towards the end of each month, the chief would travel outside the country; just to delay payment of salaries.
The chief did not believe in motivating his employees.
Financial management: Finance
Poor financial management also affected how the finances of the companies were managed.
For example, the chief would simply:
- walk into any of the companies and collect cash from the cashier.
- spend business money freely from daily sales
- instructed the cashier not to pay money into the bank without his approval.
Moreover, the chief had exceptional skills in getting loans and overdrafts from the banks.
Unfortunately, the chief was very fast in spending monies he borrowed from the banks.
But he was not as fast in paying back loans or overdrafts.
Furthermore, he forgot that “always taking out without putting back soon empties the biggest sack”.
Consequently, both the banks and other lenders lost trust in him.
Financial management: Marketing
His poor financial management also adversely affected the marketing campaigns of the companies.
The reason was that the chief did not believe that ads can drive sales.
Moreover, he assumed that customers will come on their own to buy.
Furthermore, on one occasion he sacked a marketing manager who suggested that the companies should advertise their products on local radio stations.
Consequently, he believed that money spent on adverts is money wasted.
Most importantly, he forgot that it takes money to make money.
The chief did not believe in keeping records of his business transactions.
This is because the chief never see any wisdom in keeping accounting books and records.
As a result, the accounting books only contained scanty information.
In the same vein, the balances in all the various bank statements were in red.
Consequently, none of his businesses prepared:
- Bank reconciliation statements
- Annual financial statements
- Or file tax returns.
It was, therefore, very difficult for anyone to say whether or not the companies made profits.
The collapse of the companies
Poor financial management resulted in the businesses going under.
For example, some of the consequences were as follows:
- Employees were no longer sure that they would keep their jobs
- Many of good employees left to look for better jobs elsewhere
- They spread negative news about the companies.
- Existing customer began to leave
- The quality of customer service started to drop
- There no profits to report
- Older companies were folding up as fast as new ones were registered
- Banks and other lenders came calling for their money.
- Some of the banks went to court seeking court order to hold on to the collateral submitted by the chief.
- Annual tax returns were not filed by any of the companies in the group.
- Year in year out, the chief found himself in running battles with the relevant tax authorities.
Lessons to learn from the story
Your takeaway from the above story are that:
- You can give your senior members of your staff free hands to put in their skills to work for you.
- Assign duties to your employees
- Give them authority to make certain decisions
- You need to free up time to enable you to concentrate on planning ans administration.
- Hold regular meetings with your senior employees
- Some of them might have great ideas that could move your business forward.
- Do not spend business finances on things that do not add value to your business
- You can see yourself as an “employee” rather than the boss
- Do not be too bossy; otherwise, you risk not getting useful info from your employees
- Pay your employees salaries according to the work they do, their skill and experience.
- You and your employees should work as a team
By Samuel Ijenhi
B. Sc. Accounting [University of Benin]
Benin City, Nigeria