Who Will Stay and Who Will Go?

In this second of a series on the initial steps of a turnaround, the topic is how we decide who stays with the company and who will be let go.

In last week’s column, “The Initial Steps of a Turnaround: Nothing is Sacred,” I wrote that even if Grandpa Joe invented the rocking widget that started the company, if it’s no longer profitable that product line will be shut down. And if Grandpa Joe is still around and collecting a hefty salary while he spends the day perfecting his fly-fishing technique, he has to go as well.

In previous columns I’ve written about how I’ve had to fire business owners’ relatives and favorite long-time employees. It’s never an easy or enjoyable task but often has to be done to salvage the company.

300px-Blank_org_chart2So how do I decide who continues to collect a paycheck and attend the annual company picnic and who needs to pack up their things and go?

In an ideal situation, we will have time to assess the company’s situation, create a realistic budget, and then turn to the issue of downsizing staff if necessary.

I ask for the organizational chart and then take all the names off of the chart. I take the name of every person on that chart and put it on a separate piece of paper. Then I ask the senior management, “If you could start over again, how would you arrange the company? What positions are needed today to run the company?”

In good times companies tend to get fat. They add assistants, cars, desks, sometimes even buildings. Then as times get tough these positions and assets often remain even as the company’s financial situation begins to deteriorate. It’s a vital step to review the company’s organization in a fresh way.

That process may involve eliminating some positions, consolidating three jobs into two, or having people report in a different manner. Once we rearrange the organizational chart, we go through the names of the people on the pieces of paper and place them in the positions on the chart according to which person is the best one to handle that job, keeping in mind that we need the company’s best performers, its superstars, in the most challenging positions.

When that exercise is completed there will be names left that are not on the chart. And these are the ones we have to get rid of. They no longer have a role in the restructured company.

As for those superstars. In a number of situations the best employees have already left and those superstar performers are not available within the current pool of employees. So once we have stabilized the personnel that are remaining, provided new opportunities for some of the current people and gotten the company on the correct financial path, we need to conduct a search to find those key people.

We can’t run a company with all average people. We need to create a “Lake Wobegone” situation, where like the children there, all the workers are above average.

In the next post I’ll discuss how to search for superstars.

Fraud Prevention Tip: Change the Standard by Which You Check Your Transactions

My last tip concerned reviewing the payroll, but anybody running a business knows that’s far from the only expense that fraudsters can tamper with.

Many companies have expense reports. Sometimes they come from traveling consultants or a sales force. Other times they’re the domain of local managers who take associates and leads out for meals and entertainment. Whatever it is, expense reports get handed into the appropriate department, reviewed by the person in charge, checked off and paid out.

However, what I’ve seen is that for every salesman and consultant who has his expense reports checked, there is someone whose expense reports are getting glossed over: C-level and other senior employees.

There are rarely checks and balances on these people. Sometimes the CFO is even writing his own checks – and that’s a problem. All systems require checks and balances – a theme you’re about to see resurface again and again over the course of these coming posts – and when it’s assumed that senior managers’ and officers’ expenses don’t require review you’re going to run into problems.

The CFO at a manufacturing company in Suwannee, GA knew that the golden audit number for an automatically reviewed expense was $5,000. Thus, he was writing himself tens of thousands of dollars in expense-related checks, each in the mid $4,000 range.

The mistake the company made was that these checks took two signatures but the senior person who was acting as the co-signor on these checks wasn’t double checking what he was signing. We found $180,000 worth of recent fraud. Lord knows what had been buried for ages.

The reason I suspected this was happening is because the CFO dragged his feet about getting us some of the information we wanted during our review process. That raised my concern about other issues he was and wasn’t sharing with me.

When I go into a company that’s losing money I always look at the expense reports of senior people, and when these two issues crossed I easily discovered what was happening.

Make sure that any check co-signor or anyone whose job it is to sign off on checks and expense reports understands the seriousness of what he or she is doing and doesn’t make the action a perfunctory one. You want people in those positions who ask questions, are naturally suspicious and who are willing to bring larger issues straight to the CEO.

Change the standard by which you check your transactions.

Auditors set their own level of what kinds of transactions to review and at what number (in this case, $5,000). Though auditors will occasionally spot check below that number, make sure they’re regularly peeking at any transaction above 80% of that number (in this case $4,000). I’ve found that to be, more or less, the sweet spot of those committing this kind of fraud.

What level do your auditors automatically check? What will you have them do now?