What is a processionary caterpillar manager?

 “What matters in learning is not to be taught, but to wake up.”

 Jean-Henri Fabre – father of modern entomology

In the 19th Century, Jean-Henri Fabre the famous French naturalist, conducted an experiment with Pine Processionary caterpillars. He arranged the caterpillars in a continuous loop around the rim of a flower pot, where each caterpillar’s head touched the end of the caterpillar in front of it so that the procession formed a full circle. He then placed the favourite food of the caterpillars in the middle of the circle of caterpillars.

What happened?

The caterpillars went around and around in circles formed by the procession, blindly following the caterpillar in front. Despite the food being less than 3 centimetres away, they all died of hunger and exhaustion. All they needed to survive was to change direction to get the food.

The caterpillars were following instinct – habit – custom – tradition – past experience – precedent – opinions – ‘standard practice’ or whatever you may choose to call it..

What are the lessons for managers?

  1. Activity is not accomplishment. How often are you busy, but not accomplishing anything?
  2. Are you “caught in a rut” by following traditional routines, habit patterns, or schedules and not achieving the outcomes the organisation requires to be successful in the future?
  3. As managers, balancing tradition and implementing new strategies is difficult. Success is based on the willingness to plan, fail, learn, and move forward, so the existing strategies support a successful and productive future?

So, are you or your staff acting as processionary caterpillars and mistaking activity for outcomes?

If so, what new ideas and activities are required to ensure continued success?

What habits and activities do you need to stop doing?

What are the three warning signs that a business is on the verge of failing?

“Failure isn’t fatal, but failure to change might be”

John Wooden – American basketball player and coach

Sadly, hundreds of businesses collapse each year in Australia, often owing millions to creditors and employees.

As a business owner or manager, what are the warning signs?

Please remember, we have to be honest with ourselves, have an open mind and put egos and denial aside.

“Confront the brutal facts”. This is what Jim Collins says in his book Good to Great.

Here are 3 warning signs that a business may fail:

  1. Revenue is dropping

As a manager or business owner, measuring revenue and recording it month by month over a significant period of time for at least 2 to 3 years is critical in understanding and managing the business. Many businesses have seasonal fluctuations. For example, retailers’ revenues peak before Christmas and chocolate manufacturers’ peak before Easter. It is important to understand the nature of your business.

Understanding the fluctuation in sales over the year allows you to manage your cash flow.

There is an extremely important principle in business that is often misunderstood:

Revenue is different from sales as revenue is money collected”

A sale is not a ‘true’ sale until you collect the revenue. It is important to have a cashflow forecast combined with sales and revenue recording in order to understand the implications and relationships.

A sudden drop in revenue  could result in a business not meeting their legal obligatory costs such as superannuation payments and tax payments. This is a warning sign that the business is in trouble.

I once saw a business claim to have increasing sales to a major retailer only to find out that most of the sales were on a sale or return basis. This business went broke.

  1. Cash Flow Shortage

Many businesses can be profitable but fail due to running out of cash to pay their creditors. Cash is the lifeblood of any business. For example, sales and profit may be increasing, but due to not being able to collect the sales revenue in time, the business runs out of cash.

Here is a second important principle that needs to be understood:

There is a massive difference between profit and cash.

It is therefore very important to forecast and track cashflow. By using a cashflow budget, the discipline of collecting from debtors monthly can more easily be implemented. Running out of cash is a good indication that a business is in trouble. Debtors who are slow payers and are a significant proportion of a business’ sales can put the business at risk.

Alternatively paying creditors later can significantly improve a business’ cash flow and provide funds for expansion.

In our logistics business we tracked our cash needs 6 months ahead and then tracked them against our actual performance. Wages were over 35% of our overall costs. In Australia, wages are normally paid weekly whilst collecting from creditors takes between 30 and 45 days. A single decision to outsource  our production labour with 30 day payments terms released cash into the business negating the requirement to seek external finance to grow the business.

  1. Opaque Accounts

Sadly, many business owners do not understand their accounts. Many rely on their external chartered accountant to provide them with their profit and loss figures, which are often not delivered in a timely manner. Accountants tend to report profit and loss in terms of tax compliance and rarely do the accounts provide an operating perspective.

There is a third important principle for managing business accounts:

“Variable costs, fixed costs and overheads must be clearly identified in the profit and loss statement”

I had a client whose accounts were prepared and forwarded by their external accountant up to 3 months after the end of month. The business had no idea what was making a profit. They only knew that the business made a profit. Following some discussions and correctly categorising costs into variable, fixed and overheads, we determined that there were actually three businesses or sub-businesses and that only one was making a profit.

We immediately engaged a book keeper, broke the business reporting into the three businesses and set up the accounts to reflect the operating environment. Within 6 weeks, the owner was receiving P&L information within 3 days from the end of the month. In 9 months the business had grown 50% as they could concentrate on the areas where the business was profitable. The owner now knew their gross margins, breakeven points and profits.

What are the lessons?

While the three warning signs of business failure are financial, there are two other non-financial reasons for business failure.

The first reason for business failure is poor management and systems.

They are generally symptoms of poor leadership. Management systems, both financial, sales and operational that are robust, timely and accurate are essential to manage a business both on a day to day basis and for the long term. They enhance management’s capacity to understand what is occurring in the business.

The second reason why companies fail is related to the people in the business.

In particular those in leadership positions. For example, allowing egos to undermine the evidence by believing that everything positive is due to your talents and genius and anything negative is the result of another party or the government.  This approach of internalising the positives of the business and externalising the negatives is not facing the brutal facts. Hubris and exaggerated outward confidence will mask the true situation of the business and hard decisions are not made.

In conclusion, while decreasing revenue, poor cash flow and opaque accounts may be a sign of a potential business collapse, these are often symptoms and warning signs of a potential business collapse.

The three questions you need to ask yourself are:

  • Do you recognise the signs of a potential business collapse?
  • Are your actions and attitudes part of the problem?
  • What should I do now to prevent the risk of my business collapsing?

 

3 Major mistakes business owners make with financial reporting

 

“Stay on top of your finances. Don’t leave that up to others”

Leif Garrett – USA singer and TV personality

Many business owners I meet tell me that their external accountants do their monthly accounts. In fact, one owner had his external accountant and his book keeper on site each week, and another waited 3 months to get his monthly profit and loss statement (P&L) which he didn’t look at anyway.

Did they provide financial reports that helped these owners manage their businesses?

This depends on the type of reports being created.

However, the answer is almost always………NO

What is usually provided is a service to input financial data and/or accounting services required for taxation purposes, that is to meet compliance requirements. The owners would then be given a profit and loss (P&L) statement, showing consolidated revenue less total costs to determine the profit.

Why is this a problem?

This is a problem because these P&Ls are not an operational P&Ls. This brings me to one of my favourite issues with managing businesses. The financial results that are being currently reported do not help in operating the business.

In my experience, there are 3 mistakes business owners make in financial reporting:

  1. Incorrectly categorised costs

Many businesses do not understand the difference between fixed, variable and overhead costs. Furthermore, external accountants generally do not categorise those costs as this is not required for compliance or taxation purposes. For example, it is important to know what your direct or variable costs are which vary with output or sales revenue. By not categorising costs correctly and having them in the correct section of the accounts, you cannot determine your gross margin, sometimes called your cost of goods sold (COGS) and net margin …….which leads to the next mistake…..

  1. Reports do not reflect operational needs

When costs and revenue are not placed in correct place, they will not help operationally. By consolidating costs rather than categorising them, a manager or business owner cannot easily determine which costs increase and decrease with changes in sales, or what their overheads are for operating the business.  It is essential to understand and identify each of the different costs and how they vary with activity. Often a single business has various components or different activities that make up the total business. In one of the examples above, the business was actually three different businesses, second hand vehicle sales, vehicle servicing and second-hand motor vehicle parts sales. This business owner’s revenues were consolidated and he did not know which activity was profitable and which was not…………..which leads to the next mistake…..

  1. Not knowing which parts of the business are profitable

So, did the business owner know if selling second had cars was profitable or whether it was worthwhile to continue to provide motor vehicle servicing?

No.

Therefore, the first step is to identify the different business activities. Once this is done, divide the revenue by activity and then assign to the different business units. For example, second hand car sales, spare parts sales and motor vehicle servicing.

The next step is to categorise the costs by type, variable or direct costs, indirect costs and overheads. Then assign these costs into business units. Overheads will be assigned to the consolidated business, with the P&L looking like this:

By reviewing the P&L, the business owner can see that Spare Parts is losing money and vehicle servicing has a Gross Margin of 63% and is the most profitable with a Net Margin of 48%. Furthermore, Overheads are 18% of Revenue, which would seem high and may warrant further investigation. As Spare Parts is losing $25,000 per year, possible managerial actions could be to increase prices or cease selling Spare Parts as a business activity which would result in an additional $25,000 in profit.

These are examples of what a good management or operations P&L looks like and how managers and business owners can make informed decisions.

Remember there are 3 mistakes in financial reporting:

  • Costs are incorrectly categorised
  • Reports do not reflect operational needs
  • Not knowing which parts of the business are profitable

As a manager or business owner is your operational P&L provided in a format you can use to improve your business’ performance?

 

 

Before you move forward take a look back……..

‘’We do not learn from experience, we learn from reflecting on experience’’

John Dewey – philosopher, psychologist, and educational reformer

Each December instead of releasing my monthly blog on 21st of the month, I release it early in the month giving readers time to reflect before the Christmas ‘rush’. As it is coming up to the traditional Christmas and New Year holiday period in Australia where employees head off for holidays, it is a good time for managers and business owners to reflect on the previous year.

While it is normally considered a good time to plan for the year ahead, by setting goals and targets ready for the resumption of work after the holiday period, being well-rested, with batteries recharged ready for the challenge of the new year, it is also a good time to “look back”, that is to reflect on the previous year.

Is looking back bad?

No.

If you are not reviewing the previous 12 months you often lose perspective on what has been achieved and what has not worked out as planned. Here are three questions you should ask yourself and your team in looking back over the previous year.

  1. WHAT did we do well last year and WHY?

While it is important to recognise and celebrate wins, it is just as important to ask the questions

–  ‘How did we have these wins?’

– ‘What were the actions that we as a team took to get this great result?’

Note the reasons down, share these with the team and have a goal to continue this strategy.

  1. WHAT did we do badly this year and WHY?

Sadly, many of us blame others, and make excuses as to why things fail. It’s time to put our egos aside and be honest as to the causes of the failures.

– Where did we fail?’

– ‘Where did we not strive hard enough?

– ‘Where did we not act like a team?

– ‘When was the customer not put ahead of ourselves?

– ‘What happened and what did YOU do to contribute to that result?

Make a note of the answers to the above questions and ensure that we do not do that again. After all, as managers we are accountable!

  1. WHAT goals did we set this time last year that we did not achieve and WHY?

As Albert Einstein said, “Insanity is doing the same thing repeatedly and expecting different results”, so establishing the same goals and associated actions as last year will most likely give you the same result.

– ‘Why did we set them?

– ‘Why didn’t we achieve them?’

‘- Did these goals really matter?

– ‘Is it different this time?’

Discuss with your team as to whether the goals are still a priority, and should they be the same goals again for this year?

Having answered these questions, honestly and openly you and your team are ready to set goals and plans for the next calendar year.

Does your team have the skills, capabilities, work ethic and behavioural characteristics to be a ‘winning’ team for next year?

To my blog readers, best wishes for Christmas and 2019

What were the management lessons from the Battle of Britain?

“Never in the field of human conflict was so much owed by so many to so few”

Winston Churchill

In the Battle of Britain, the history books champion the heroics of the fighter squadrons of the RAF in defeating the German Luftwaffe. Churchill seeks to reinforce this view through his famous quote about ‘the few’, being the fighter pilots of the RAF Fighter Command. In reality, the reasons for the British victory were far more complex.

The Battle of Britain is considered to have occurred between 10th July 1940 to 31st October 1940, commencing soon after the fall of France on 25th June, 1940. The German strategy was to obtain air superiority over Britain before Operation Sealion, Hitler’s invasion of Britain. The Luftwaffe had over 2,600 attacking aircraft, bombers and fighters whilst Fighter Command had only 640 fighter aircraft, although there were over 1300 other non-fighter aircraft such as bombers, transport and reconnaissance aircraft. When the Battle ended, the Luftwaffe had lost nearly 2,000 aircraft and over 2,600 airmen, compared to the RAF, who lost over 1,000 aircraft and just over 530 airmen.

So how did the RAF succeed against such odds?

There were a number of inter-related reasons, including German fighters flying at the end of their range, the use of radar by the British, poor German intelligence, the bravery and skill of the RAF pilots, higher attrition of German pilots compared to the British, the weather, and confused and changing German strategy. The German strategy for example, changed from attacking the ports and Channel convoys, to destroying the RAF, either on the ground or in the air, and then later bombing the cities and industrial sites in southern England. Furthermore, the German Luftwaffe headed by Goring, was both autocratic and bureaucratic.

However, the prime reason is considered to have been the tactics initiated by Air Marshall Hugh Dowding. Through the use of new technology, radar and a flexible command structure called the Dowding System, which moulded together technology, ground defences and fighter aircraft,  the RAF eventually repulsed the Luffwaffe. Interestingly, Blitzkreig’s initial success can be attributed to using technology and a flexible command structure. Britain was divided into four geographical areas called ‘Groups’ and then ‘Sectors’. Each ‘Sector’ had a fighter airfield with an Operations Room from where the fighters could be directed. As radar tracked the incoming Luftwaffe raids, information was sent to Group headquarters, then to the ‘Sectors’ where fighters would be scrambled and air defence stations notified, all in a short period of time. This strategy allowed the RAF to engage the enemy selectively and in a timely way. The RAF fighters did not engage German fighters unless they were escorting bombers, with Hurricane fighters attacking the German bombers and the Spitfire fighters waiting for the bombers to turn for France before attacking both fighters and bombers when they had little fuel or ammunition. It is a common misconception that the Spitfires and Hurricanes were offensive weapons. They weren’t. They were defensive interceptors, with the sole purpose to intercept bombers on the way in, and prevent them from carrying out their mission and hunting them down when they turned back to France. In reality, the bombers were the attack weapons, to attacking industrial centres, cities, shipping and ports.

What are the management lessons from the Battle of Britain?

There are potentially 3 management lessons from the Battle of Britain.

  1. Flexible management systems are better than authoritarian and bureaucratic systems

For example, I was able to contribute the success of our logistics business by empowering supervisors to communicate directly with their assigned customers. This not only improved customer service but developed the supervisory and management skills of the supervisor.

  1. Technology is only an enabler

As an example, our logistics business was created from an opportunity when a major Australian retailer changed their supply chain systems, forcing suppliers to prepare their products in a store-floor ready condition. The enabler was technology (EDI), as it allowed for a more efficient management of the supply chain.

  1. Engage on your own terms

Too often, business owners try to be all things to all people and do not focus on their strengths and niche and end up competing against larger and better resourced competitors. For example, in our logistics business, we targeted to great success, smaller owner operated companies who did not want to deal with large impersonal organisations.

In conclusion, as managers and business owners we can learn some valuable lessons from the Battle of Britain. Technology is only an enabler. For example, AirBnB’s software has ‘enabled’ a new source of cheaper accommodation for travelers through the letting of private rooms and apartments that were not previously considered available. Flexible management systems that are agile will beat bureaucratic organisations everytime. Kodak, who initially invented the digital camera, failed to commercialise it successfully. And finally, engaging on your own terms where you have a competitive advantage and not go head to head with your competitors is a sensible strategy. A good example of this strategy is the success of Yellowtail Wines where a small Australian family owned wine company created a new market for wine in USA and avoided head-to-head confrontation with the major industry players.

There are valuable lessons for managers in studying history……

 

Could you manage a crisis?

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”

Warren Buffett – businessman, investor and philanthropist

In business, often the hardest issue to manage is a crisis. Crisis management should form part of your organisation’s Risk Management Plan. A properly developed and implemented crisis management plan can result in resolving the crisis, continuation of business as usual, and preservation of your organisation’s reputation and financial stability.

So, what is the definition of a crisis?

A crisis has three common elements:

  1. It is a threat to the organisation
  2. It has an element of surprise
  3. There is a short decision time

One of the worst examples of managing a corporate crisis was the BP oil spill in 2010 where 11 rig workers were killed and millions of barrels of oil spilled into the Gulf of Mexico. The crisis went on for months, billions of dollars of damage was done to the environment, BP’s share price plummeted and the CEO, whose incompetence in managing the crisis contributed to the disaster for BP, lost his job.

How should a crisis management plan work?

By way of example, many years ago I was a manager of a large trucking company in an Australian rural city when a major incident occurred that met the three common elements of a crisis.

  1. it had the element of surprise
  2. was a threat to the business in terms of reputation and financially
  3. a decision had to be made quickly

In the very early hours of the morning I received a phone call from the Maintenance Manager to say one of our trucks had crashed into a house in the city. The truck, a fully laden semi-trailer had driven into a residential area and when finding it was in a cul-de-sac had reversed into a house, partially destroying the front bedroom. To add to the drama, inside the bedroom was a young mentally disabled adult. When she heard the truck backing into her room she became hysterical. You can only image how stressed the family were.

In the initial telephone conversation with the Maintenance Manager, I did not recognise the driver’s name so drove to the Police Station to try and identify him. When I arrived, I could not identify the driver, who was apparently drunk. Further confusing the situation, it then became clear that he had broken into the transport yard and stolen the truck. It would have been even worse if the truck thief had driven up the highway drunk and then crashed into car killed a family.

So, was the trucking company responsible?

Technically, we were not responsible, as the driver was not an employee, had stolen the vehicle and was drunk.

Was denying responsibility and walking away from the incident a sensible action?

No, unlike BP in the Gulf of Mexico’s oil spill we immediately implemented our crisis management plan. This included a clear communication strategy in stark contrast to the BP situation.

We had to act quickly.

The family was immediately placed in a motel. Working with the Police, we released a media statement to the local radio station, newspaper and TV station explaining what had happened and what we were doing for the family. Repairs to the house were organised, completed and within 2 weeks the family moved back in.

The company’s reputation enhanced in the community as already one of the largest employers in the city, we were now also seen as being the most socially responsible. The family affected formally thanked us, the business was not financially threatened, and the business continued as usual.

So, does your organisation have a crisis management plan?

If not, I would recommend developing a crisis management plan and testing it, something that BP failed to do.

Post Note: the driver gave the Police several false names, however he was eventually identified by his tattoos. He was charged, convicted and sentenced for vehicle theft, drunken driving and malicious damage.

Blitzkrieg – lessons for managers?

German_tanks_invade_Poland_1939_large

 “You can’t outrun the future if you don’t see it coming. Individuals who get startled by the future weren’t paying attention”.

Gary Hamel – London Business School Professor

What is blitzkrieg?

Blitzkrieg roughly translated from German means “lightening war” and was a method of warfare used by Nazi Germany in successfully invading northern Europe in World War II (1). At the beginning of World War II, France had the largest army in Europe, and the most tanks and aircraft but was defeated comprehensibly by the Nazi war machine in a matter of weeks in 1940. To be successful, Nazi German did not fight France on their terms or in more traditional ways, instead they used ‘blitzkrieg’.

So how did the Germans successfully invade France in World War II?

Following World War I, the French built a series of defensive forts on their eastern frontier with Germany called the Maginot Line, to protect them against invasion.  Although outnumbered, the Germans used a combination of tanks, motorised infantry and aircraft in a combined offensive mobile approach using excellent radio communications. They bypassed the Maginot line and attacked France through the Ardennes which the French considered ‘tank proof’.

By comparison, the French relied on static forts and viewed tanks as a defensive weapon to support their infantry. Also, few of the heavy tanks had radios and furthermore they were unreliable.

What are the lessons from blitzkrieg that can be used in business?

In summary it was ‘old war’ v ‘new war’ and broke the ‘old thinking’.

The German approach meant challenging the traditional ways by doing things differently which required planning to get around a superior enemy, without fighting on the enemy’s terms, and by using:

  • speed and efficiency – mobile infantry and tanks supported by aircraft
  • new technology – extensive use of radios

There are many examples of companies who failed to change which resulted in their demise. For example, although Kodak invented the digital camera it failed to commercialise it. Nokia the leading mobile phone business at the time invented the smart phone, however its delay in commercialising it meant the company was overtaken by Apple and Samsung. I had a client whose business relied for the majority of its revenue on providing engineering services to a major vehicle manufacturer in Australia. The owner proudly told me that he could always rely on this company as he had dealt with them for over 30 years. Within 2 years of this statement, vehicle manufacturing ceased and his business folded.

As business owners and managers, we must always be thinking of new ways of doing things, embracing new technologies and seeking outside assistance where appropriate ……….

Here are three questions you can ask yourself:

  1. how can I get customers from my competitors but not compete on the same terms?
  2. where is my business vulnerable to new technologies?
  3. are any of my new or existing competitors competing differently in the market?

This is your challenge!

After all, ignoring emerging trends or becoming overly absorbed in the present is naïve or even reckless.

  1. Note: the use of Blitzkrieg as an example of a management technique and is not to be misinterpreted as support for the evil actions of Nazi Germany which resulted in over 30 million deaths in World War II.

 

Further lessons from the farm……………

“Farming looks mighty easy when your plough is a pencil and you’re a thousand miles from the corn field”

Dwight D. Eisenhower – President USA

Each year I write a blog about ‘lessons from the farm’. In 2016 it was about  constant renewal and in 2017 it was about being careful in assessing opportunities and watching for hidden problems.  Growing up on a farm in country New South Wales, Australia provided me with a great grounding for life. It certainly gave me the experience and a sense of perspective to be successful, academically and in business and to handle difficult issues when they arose.

Being a farmer is more than a job, it’s a way of life. It is full of life lessons that you can use as a manager or business owner.  Farming is unpredictable – as a farmer you are at the mercy of the weather, whether it be droughts, storms or floods, as well as fluctuating commodity prices.

So what lessons can a farming life provide?

Here are 3 lessons from my childhood…

  1. Always be optimistic. As a farmer, you tend to always look on the bright side of life even when the problems seem insurmountable. Whether it’s a crippling drought or a flood, or a tractor that breaks down in the middle of the sowing season, there is always tomorrow, next week or next year. I witnessed my father struggling financially to hand-feed sheep during a drought believing that prices would improve. Later on, wool prices increased and this made his efforts worthwhile.
  2. Deal with disappointment. Often on the farm, despite giving your best effort, things don’t work out. The weather can be unpredictable, crops can be ruined and animals can be lost to drought, flood or fire. This taught me that life is not easy and you deal with disappointment by being resilient. You must keep continuing on. In a period of severe drought, with no farm income and four hungry boys to feed, as a family we dealt with this difficult period by my mother breeding Corgi pups for city people.
  3. You reap what you sow. Despite the unpredictability of mother nature, in farming generally you get out of it what you put in. Proper preparation of the land before sowing a crop will be more likely to produce a successful crop. The lesson is that when you dedicate your time to doing a job correctly, without cutting corners, you are more likely to get your desired results. In business and in life, the results you get are based directly on the efforts you put into it. Over 40 years ago, my father saw a gap in the market for low fat drought hardy beef cattle. He began breeding Limousin cattle from France, initially through artificial insemination using semen from the best French bulls. Within 10 years his cattle were winning national beef competitions in Australia.

These lessons from the farm serve as good examples of lessons for life. Life is often not easy, whether with family, business or your career. I found myself facing difficult issues in business, whether it was the loss of a major customers, slow paying customers or staff issues. In one year we lost our 2 largest customers in circumstances beyond our control. This threatened the viability of the business. It was similar to the farmer’s livelihood being threatened by mother nature. We knuckled down, believed that the future would improve, dealt with the disappointment and worked hard at marketing our services. Within 2 years our business had grown 50%.

Can you think of examples where you overcame adversity and grew?

Using lessons from the farm is a good reference point for action.

Are you an ostrich or meerkat manager?

“What makes us human may not be uniquely human after all”

David Attenborough – naturalist and TV compare

What kind of manager are you?

An ostrich or a meerkat?

Last year I travelled to Southern Africa and experienced viewing the amazing African wildlife from a canoe and a 4WD safari vehicle. African wildlife is best viewed quietly, early in the morning or in the evening. I love watching David Attenborough’s nature series. The most recent series I watched was about meerkats. Unfortunately, I did not see an meerkats on my trip. However, I did see some elephants, hippos, lions, wild dogs, jackals, crocodiles, various species of antelopes, buffalos, hyenas, monkeys and ostriches.

This got me thinking about management styles and the animal kingdom. On safari you have plenty of time to think and reflect. Watching the sun rise, lying under a tree during the heat of the day or drifting in a canoe. Some animals remind me of some of the managers and business owners I have met over the past 30 years.

Think of the ostrich. What do they do? They run, hide and avoid a problem. An ostrich does not actually bury its head in the sand when confronted by danger. However, they flop to the ground and remain motionless. This passive behaviour only exacerbates the danger and it becomes an easy target for a predator. Not much good if a lion or hyena is hungry and chasing you.

Ostrich managers refuse to recognise reality, do not listen, are often loaners, refuse to seek advice, don’t act on facts and resist change. They do things the same way they have always done and fail to adapt.

On the opposite side of the African animal kingdom, are meerkats. Meerkats are a species of mongoose. They live in colonies of up 40 animals in desert or semi-arid areas of Southern Africa. What are the traits of a meerkat? A meerkat sits up, scans the horizon to watch for danger, is constantly alert and addresses the risks and adapts. Meerkats also display altruistic behaviour and watch out for others in the colony and work as a team. This includes lactating to feed others babies. They nurture, mentor and teach young meerkats to hunt. For example, adults pull the tail of scorpions, a favourite food so young ones can safely learn to hunt.

Meerkat managers build strong cohesive teams, are always looking out for others in their team, mentor staff members, look out and adjust for risk, collaborate with others and continue professional education and

So, some questions you may wish to ask yourself….

Are you an ostrich manager or a meerkat manager?

What are you DOING to become a meerkat manager?

What should you STOP doing to become a meerkat manager?

Is there a thief or fraudster in your business?

employee-dishonesty

“I take full responsibility for what happened at Enron. But saying that, I know in my mind that I did nothing criminal”

Kenneth Lay – disgraced criminal former CEO of Enron

Normally my blog is released every month on 21st day except for Christmas and when I am away overseas. This is one of those blogs. It was prompted by a conversation with a friend whose business did not get paid because their IT system was hacked, diverting the payment to a fictitious bank account. Their customer did not have the checks and balances in their accounts payable department. However, most fraud is internal.

Is there a fraudster or thief in your business?

In the media headlines, we regularly hear about business fraud from chief executives defrauding the company to cover gambling debts, to public servants giving contracts to family friends and associates, and to senior managers being appointed on false resumes.

However, fraud and theft in organisations are more widespread than the media portrays and are often hidden as it is embarrassing to the organisation and its management. Most theft and fraud occurs within an organisation and not outside the organisation. In Australia, theft in retail by employees is far higher than theft from shop lifting.

Every organisation needs to be vigilant where ever possible against theft and fraud and have the appropriate systems in place to prevent it occurring. I once worked for a company where it was rumoured several of the senior managers were perpetuating fraud. The clue was that they were living beyond their means. An alert CFO decided to engage forensic accountants. The subsequent investigation found fraud extended back over a decade and involved millions of dollars. The culprits were sacked and it was never reported to shareholders.

For fraud or theft to occur there needs to be three conditions. This is often called the fraud triangle.

  • Motivation – this is often related to personal financial situation and living beyond their means. For example, gambling debts. When I was in business we had a customer who was defrauded for over $1m by a ‘trusted’ employee who had gambling debts
  • Opportunity – access to cash or goods and understanding of the company’s systems. For example, truck drivers and dispatch staff in a warehouse colluding to steal stock
  • Rationalisation – where employees often feel justified in their actions. For example, an employee who feels aggrieved by their salary or envious of the business or owner making a profit.

Most fraud or theft is result of a lack of segregation of duties, inadequate check and balance systems and inadequate supervision.

In reducing the opportunity to steal or defraud where do you start?

Like most things in an organisation it starts at the top. The first step is the culture.

  • set the right ethical tone from the top of the organisation
  • communicate no tolerance of unethical behavior
  • walk the talk and set the right example

As a business owner or manager…………….

“You own the business; you own the risk. Identify it and manage it.”

The second step is to ensure internal accounting controls are in place. Identify the areas of the business most at risk of fraud and focus your attention in improving controls in those areas, especially the ones relating to how money is moved around the business. For example, when paying suppliers and wages separate out who can raise an invoice and who can pay it. Create a system where a second person is responsible for authorising payments that have been approved before the money leaves the organisation’s bank account.

The final step is to have a system that will uncover fraud and theft. Two examples are:

  • whistle blower policy that protects the whistle blower. For example, it may be a phone number an employee can call such as the Chief Financial Officer. Most fraud is uncovered by employees
  • regularly and systematically analyse the data in high risk areas such as payroll and procurement and investigate transactions that do not look right

As well as being a management distraction when discovered, serious fraud and theft can destroy a company and jobs.

Unfortunately, in over 30 years of life in business I have witnessed too many acts of theft and fraud. In most cases, they continued until discovered and were the result of poor systems and supervisory management. Generally, theft and fraud starts small and then as the perpetrators become more bold and greedy they become careless. Often it’s a small indiscretion that tips a manager off and often it is the ‘tip of the iceberg’.

In my work experience two examples spring to mind. Personal items from motor vehicles were being stolen in transit. When the employees were caught the police found an ‘Aladdin’s Cave’ of stolen items. In another example, a supplier was randomly checked and it was found to be owned by two managers who were directing non-existent services and collecting the money.

In conclusion, in your organisation are you vigilant about theft and fraud?

Do you have the necessary systems in place that discourage it?

More importantly do you set the moral tone and walk the talk and set the standard that theft and fraud at any level is unacceptable and will be dealt with accordingly?

Remember, a fish goes rotten from the head first.