Cardinal sins of management

Cardinal Sins Of Management

We live in an age of mass-market management manuals. Everywhere there are books and pamphlets and brochures on how to launch and run successful companies. But in this huge mass of advice, a critical chunk of management wisdom is missing - advice on how to avoid the management mistakes that can damage even the best of businesses.

By avoiding the cardinal sins that can get companies into trouble, a CEO can prevent problems and, ultimately, increase the business's profits.

"One of the great sins of business management is allowing yourself to use tax dollars for working capital," says Edmond P. Freiermuth, a Santa Monica, Calif., consultant who specializes in turning around troubled companies. "Once you start using the withholding taxes you're supposed to be sending to the Internal Revenue Service, you start digging a hole from which it becomes harder and harder to emerge.

"If cash-flow problems require that you give some creditors the short shrift, don't include the IRS in that group. The idea is to get current on tax payments and to stay that way. Here's a strategy that can help:

"Contract with an outside service to process your payroll. Most will refuse to issue paychecks unless there are sufficient funds on hand to pay the necessary taxes. The service may cost more than processing the payroll on your own, but the price you pay won't compare to the costs and penalties you'll incur should you fail to meet your tax obligations."

Consider these additional "don'ts" of business management:

Don't play cat and mouse with your banker. Sure, when business is slow and loan payments are falling behind, your banker is the last person you want to talk to. So you duck the calls and letters.

Big mistake. The very time that business is most dreadful - when sales and profits are sliding precipitously - is when you should step up communications with your banker. Candor is critical here. That's because if there's anything a banker hates, it's a nasty surprise. If you inform your banker of a business problem only after it has become a crisis, the banker will lose faith in you. You'll be burning your financial bridges behind you.

There's also a positive reason. Because they are experienced at solving financial problems, bankers can often come up with solutions you could never arrange on your own.

"Let's say you took out a five-year loan that you could handle quite comfortably at the outset," says Barry Schreiber, a partner with the New York accounting firm of Richard A. Eisner & Co. "But then two years down the road a recession brings about a slump in your business. Suddenly the loan is a hardship. Bottom line: You can barely make the payments.

"Rather than trying to hide your plight from the banker, you'd be wise to tell him about it. In many such cases, bankers can renegotiate the financing, allowing you to make interest-only payments for a period of time or to stretch out the term so that the monthly payments are more manageable. Bankers have become more creative in recent years. Why not see if they can put that creativity to work for you?"

Don't be blinded by ego. It's a mistake to think you can run your business single-handedly. To succeed in business today, you'll need wise counsel in marketing, finance, and administration. You can hire professionals in these disciplines, and chances are you should, but if you're really smart, you would get the kind of shrewd advice money can't buy. You should assemble a board of directors that includes business executives - whether active or retired - as well as faculty members from local business schools, and financiers, including bankers and venture capitalists.

Hold board meetings at least four times a year, reviewing your decisions with the directors and asking them for candid opinions of your management performance. Make it clear that the idea is to challenge rather than rubber-stamp you.

"The independent board members make an invaluable contribution to my company by helping me to paint a different perspective on a series of key issues," says Ann Lieff, chief executive of Spec's Music Stores, a Coral Gables, Fla.-based chain of record and video outlets.

"For example, when we were hit with staggering rent increases at a number of our stores, I was distraught," she says. "Some of the units had been part of the Spec's chain for more than 10 years, and I'd become emotionally attached to them. The thought of giving up [the locations] seemed terrible, but so too did the prospect of paying exorbitant rents. Caught between a rock and a hard place, I felt miserable.

"That's until I raised the issue with one of my board members. He told me to just look at the numbers. If I could continue to earn a sufficient return at the higher rent, I should sign the new lease; if not, I should look for new space. As an entrepreneur who had owned hundreds of restaurants in leased space, he knew exactly how to deal with this issue.

"That's one of the beauties of attracting experienced board members: Because they've already faced and solved so many of the issues that are new to you, they can bring the wisdom of hindsight to your decision making."

Don't "fix what ain't broke." Meaning: If something is going well in your business, leave it alone. Sounds obvious, right? But it isn't always that way. The temptation to "fix what ain't broke" frequently prompts CEOs to meddle where they shouldn't.

Just recently, for example, a retail merchant who has been in business for 20 years found himself courted by competing wholesalers who pitched hard to gain his account. When one promised lower prices that would yield annual savings of $10,000, the merchant was tempted to make the switch even though his current supplier had been serving him efficiently and reliably for two decades. He was tempted, that is, until an adviser reminded him that the savings were hardly worth jeopardizing a supply arrangement that functioned so smoothly. In the end, the merchant stuck with the original supplier.

Don't stick with a manager when the person is no longer right for the job. "As companies grow, the employees don't always grow along with them," says Bruce Clark, executive director of Interim Management Corp., an executive recruiting firm in New York City. "All too often, the CEO keeps thinking he can bring the person up to speed with more training, more education, more experience. While there's nothing wrong with giving your people a chance to succeed, as the boss you also have to know when you're dealing with a lost cause. Wait too long to replace key executives and you'll feel the effects where it hurts most - on the bottom line.

"For example, it's one thing to manage the sales function for a $5-million-a-year company that sells through a single sales force in a limited geographic market, and another thing entirely to manage sales for a $20 million company that sells through two sales forces and that covers international markets. The person who performed well in the first capacity may not have what it takes to succeed in the second.... The underlying rule is to replace or transfer managers before they are operating at their level of incompetence."

Don't relegate. Delegate. As the growing business prepares to cross the threshold from an entrepreneurial to a professionally managed business, the CEO authorizes subordinates to perform many of the functions the boss once handled alone. This is a critical prerequisite for success, but it is often mismanaged.

"The process doesn't work when the CEO simply relegates responsibility to those who are closest to the function, even if they are incapable of handling it," Freiermuth says.

"But that's what happens all the time. For example, when the CEO recognizes it's high time that the company had a controller, he simply promotes the bookkeeper into that position, even though the bookkeeper isn't a CPA and is hardly up to the task. After filling a number of positions on this basis, the CEO pats himself on the back and says: `I've delegated day-to-day management to others. Now I'm free to pursue more exciting things like mergers and diversification.'

"But he's not really free to do anything [not if he cares for the well-being of the company], because he hasn't really delegated; he's only relegated. Putting incompetents in place to handle major functions is a prescription for disaster. Once the CEO recognizes his need for professional management, he has to devote considerable time and thought to filling those positions.

"Only after he fills all the key positions by recruiting the appropriate talent is the CEO free to pursue the long-term, strategic issues the company must face."

Don't finance expansion or diversification entirely with credit. An overly liberal use of credit can have damaging repercussions. Freiermuth says, "In today's lending environment, successful companies can borrow all they want to from a wide range of capital sources," and that can become addictive. He says there is danger when managers take out enormous loans to finance expansion and diversification.

"Should that expansion or diversification falter, and should the business find itself hard-pressed to repay that huge debt," says Freiermuth, the lenders could downgrade the company's credit rating. And "quickly the problems brought on by the expansion or diversification impact the core business, threatening that as well.

"A wiser approach," Freiermuth says, "is to limit the use of credit to no more than three times equity. This ratio, which is generally considered safe, is watched closely by the banks. Most are reluctant to make additional loans to companies stretched beyond this point."

Don't chase after unprofitable business, sacrificing gross margins for the sake of higher sales. "You'd think experienced entrepreneurs would be too shrewd to chase unprofitable or marginally profitable business, but they do it all the time," says Joel S. Singer, a senior manager with the New York-based business-consulting group of Spicer & Oppenheim, CPAs.

"Sure, Coke and Pepsi and other corporate giants can afford to temporarily sacrifice margins for market share, but for smaller businesses, that's playing with fire. The company that's used to earning 10 cents on the dollar is going to suffer through bad times if it has to make do with 5 cents or less. That's the danger of tampering with profit margins."

PHOTO : Breaking into the piggy bank of funds earmarked for Uncle Sam can be a most costly way to borrow.

PHOTO : Playing cat and mouse with your banker when your firm is in a little trouble can mean big trouble later.

Business columnist Mark Stevens is the author of Sudden Death: The Rise and Fall of E.F. Hutton.

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