Category Archives: Risk Management

What is Your Employee Retention Strategy?

Any accountant will tell you that employee costs are some of the most significant routine expenditures that companies make. Payroll has a big impact on cash flow and the bottom line, but so do employer payroll taxes, state unemployment insurance, workers compensation insurance, retirement and health benefits, vacation, and so forth.

Although it costs a lot to hire and retain employees, don’t underestimate the costs when they leave. Either existing employees have to pick up the slack, which can cause stress and resentment when not accompanied by a pay increase (as is often the case), or new employees have to be hired and trained. This takes time, interrupts progress, and in the process of training, a new employee can make mistakes that cost the company money.

Talent is a key constraint for a growing business. Companies cannot grow without the right people on the team. A senior management team that is serious about growth and strategy makes sure to effectively manage the risk of employee turnover. When management has a well-defined vision for company growth and can articulate the potential long-term upside that employees have in the business — coupled with nearer-term incentives — the organization can be positioned well to attract and retain good talent.

Last year the Journal of Accountancy provided a summary of a WorldatWork survey. Among other findings, 65% of respondents said senior managers were concerned about retention. Even as opinions of the economy continue to be mixed, it seems that employees have felt more confident exploring options for “greener pastures” in the marketplace.

The survey found that employees leave for more money, better promotional opportunities, more equitable pay in line with market rates and in recognition of personal contributions, less stressful workloads, more work-life balance, better leadership, and more training and development opportunities.

The strategies employers use are not surprising when one considers the basic desires of workers, namely money and freedom: “Companies that have retention programs tend to keep key talent by offering above-average pay and benefits such as flexible scheduling, the survey showed.” Also, the survey showed that managers are careful to communicate future opportunities with key employees.

In short, senior management can either define and implement an effective retention strategy, or it can let others in the marketplace demonstrate a superior ability to hire away good talent. Some very effective methods of retention can be low-cost, such as giving employees a sense of empowerment and ownership. Rather than just paying more money, partner with employees in tangible ways to help them advance with the business and make progress with their career goals.

In addition, while employees will always want more money, there might be ways to implement flexible scheduling to help them feel like they have more freedom and ownership of their work and schedule. Rather than micro-managing their work and schedule with an iron fist, treat them like grownups and expect them to act as such; the results can be remarkable.

Think Twice Before Mixing Personal Relationships With Business

Have you ever tried to mix personal family or friendship relationships with business? How did it work for you? Some people function very well in a context of mixing work with friendship or family life. Others struggle with many inherent pitfalls. Whether you choose to rush in or avoid these arrangements, it is wise to be prepared. More than likely, even if it’s not of your own making, you will someday be in a position to deal with a scenario that involves the mixing of personal with business relationships.

In my experience as a finance professional I have seen business situations in which the participants’ actions were heavily impacted by relationships with family or friends who were involved. Even the savviest businessperson can struggle to make decisions at “arm’s length” when the personal relationship is clearly not arm’s length.

Personal finance guru Dave Ramsey advises, “I do a lot of business with friends. But I make sure that the specific requirements of our relationship are laid out very clearly, in writing.” In addition, “Just be straightforward, and make sure the rules are understood by everyone involved. Then, when you have to enforce the rules, do it gently but firmly.”

Of course, the tendency when working with friends or family members is to avoid solidifying details or getting anything in writing, let alone seeking legal counsel. After all, this can wrongly be perceived as demonstrating a lack of trust.

In reality, the best way to preserve relationships is to manage expectations. Talk through the relevant deal points, and solidify your agreements in writing. No exceptions really means no exceptions: Get your agreements in writing, even (or perhaps, especially) when dealing with family or friends.

Blogger Ron Edmondson provided some cautions on working with friends, including risks for both the organization and the relationship between friends: “The bottom line is that doing the best thing for the organization often involves making hard decisions. Leaders should not be held back because of the level of difficulty.”

Doing business with disinterested third parties is more straightforward in some respects because both parties are clear that the relationship is business, not personal. Attorney and CPA Mark Kohler recommends a simple test to determine whether to enter a business relationship: “Bottom line: if you feel you can’t ask for thorough documentation, or could never sue or send a nasty letter to the person you are going to be in business with, this is probably a project you should walk away from to hang on to the relationship.”

Rob Weinberg gives insight on his approach: “So if I’m doing business with a friend I find it’s critical to insist at the outset that the friendship is the priority. If there’s ever a question of the business tainting the friendship, we both agree to walk away from the business relationship. Furthermore, any indication of uncertainty at the outset eliminates the possibility of our working together.”

Harrison Barnes provides perspective on why organizations do not allow managers to hire their friends or relatives: “Reducing corruption and increasing efficiency are the primary reasons many organizations have anti-nepotism policies. Corruption has always been a concern in this realm. If individuals who are friends or relatives work together, organizations fear that these individuals may collaborate to advance their own interests rather than the interests of the organization.”

In future installments we will look at how finance professionals can position themselves to help navigate their businesses through tricky scenarios, and one of these would be a personal-turned-business relationship that goes awry.

Five Reasons to Implement Written Policies and Procedures

As with putting goals in writing and getting agreements in writing, successful organizations follow the best practice of documenting policies and procedures in writing. Here are five reasons to put time and effort into documenting policies and procedures:

  • As with writing down goals and agreements, the process of documenting policies and procedures forces senior management to step back and carefully think about how they run their business. Rather than spending days “putting out fires” that are often created by having no formal standards, management can work toward smoother operations by documenting policies and procedures for every area of the business that requires judgment and discretion or involves risk.
  • New hires will quickly get up to speed on how management runs the organization. To be sure, documenting policies and procedures takes some thought and effort on the front-end. However, in today’s world of high employee turnover, the initial new hire training process will be more effective when supervisors have a standard approach to bringing employees up to speed.
  • Employees will appreciate knowing what is expected of them and what they can expect from management. No one appreciates rule-makers who “make it up as they go along.” Take time to systematically document clear answers to implicit questions that every employee asks. Never assume that employee assumptions — absent clear and documented guidance — about organizational policies and procedures will align with management’s intentions.
  • Employees, investors, customers, vendors, regulators, and other stakeholders will have the perception that the company is well-managed by people who care.
  • Implementing consistent and predictable processes will facilitate company growth. Putting out fires all day long is not a scalable management style; the organization can only grow so far until one of the fires gets big enough to finally burn it down. Enhance scalability by standardizing processes, policies, and procedures. The constantly changing marketplace provides more than enough uncertainty for every senior manager that I know. Consistent policies and procedures provide a welcomed oasis of stability and predictability in today’s business world. This is often more than a luxury; it is a requirement for growth and survival as the organization adapts to external challenges.

I once heard a senior-level manager communicate his preference for leaving policies and procedures unwritten so as to avoid legal ramifications in case the organization diverged from them. This is a good strategy for managers who are unwilling to put thought and care into formulating good policies and procedures and maintaining effective enforcement mechanisms. However, it is a bad policy for an organization that plans to significantly scale operations over time. There are plenty of reasons why large organizations take time and exercise care to document and communicate their expectations for consistent, reliable operations and behaviors within formal, written policies and procedures. Finance professionals can contribute needed professional judgment toward every area of the policy-making process.

Planning for Change: Be Flexible and Responsive

Though it’s almost a cliche by now, the statement is true: Change is constant and rapid. The environment of constant change requires business managers to be flexible, attentive, and responsive. A recent CFO Magazine article, New Strategies Around Strategy, provides some insights that I summarize below:

  • Have a long-term plan to set forth the direction for your products, markets, and strategy.
  • Be flexible and nimble; based on changing factors in the marketplace, test the assumptions that went into your planning.
  • Have contingency plans in place so that you will be ready to quickly respond to changes in the marketplace.
  • Recognize that change is the “new normal,” and embrace the environment by taking calculated risks.
  • Information is vital for planning, especially historical insights about how businesses responded in challenging circumstances.
  • Write your long-term plan in pencil, not in ink. Keep an eraser handy.

Read the entire article for more details about flexibly budgeting and strategically planning.

Five Ways to Avoid Getting Ripped Off

In theory, the world would be a great place to work if everyone were honest, transparent, and competent. We would not have to waste time out of our busy workdays uncovering and dealing with mistakes, frauds, intrigues, scandals, shenanigans, and so forth. We could focus on what we’re really in business to do, which is satisfying customers’ demands efficiently and effectively.

In reality, we all know the world is different from this. Regrettably, life is not so straightforward. Work and business are complicated by the ever-present necessity to maintain situational awareness and never let our guard down. Without being paranoid or cynical, we understand reality — everyone in the business world is looking out for their own best interests, regardless of how positively or negatively this might affect you or your business.

In the spirit of managing risk, here are five tips for avoiding getting ripped off:

  1. Demonstrate due diligence. Sometimes prevention is the best cure. Effectively position yourself to give others the impression that you are watching over your interests with an eagle eye. In a situation of risk and uncertainty, demonstrate that you will do whatever it takes to dot all the i’s and cross all the t’s to ensure that you are not taken for a ride. At the same time, be careful to maintain the element of surprise and not divulge key facets of your due diligence strategy.
  2. Ask open-ended questions in a non-threatening manner. Take the lead on getting to the bottom of whatever matter you are handling. Know when to be laid-back and casual and when to lower the hammer. In certain situations, if you ask pointed questions or insinuate suspicions of wrongdoing up-front, you will often encounter stonewalling and defensiveness. It is better to give the other person an opportunity to voluntarily come clean if they have the impression that you are bargaining in good faith. If information is not forthcoming after a brief time period with the casual approach, more drastic steps can be pursued.
  3. Anticipate responses. Know the boundaries of what would constitute a legitimate explanation versus what you should consider an excuse, illegitimate rationalization, non sequitur, or plain old lie. Have follow up questions planned depending on what responses you receive. Also, anticipate that others you are dealing with will try to use the element of surprise to their own advantage. Expect the unexpected.
  4. Make sure you understand. Be alert for a “shark in the water” when you hear someone throw out expressions that are clearly intended to artfully baffle others. Some people are easy to manipulate, so don’t let yourself be one with the wool pulled over your eyes. Don’t take everything you hear at face value. Dig deeper, and don’t ignore red flags.
  5. Buy time. Issues arise over time. If you are dealing with a legitimate operator you will notice a pattern of competence, professionalism, and integrity. Take time to observe who you are dealing with, and realize that they are generally putting their best foot forward for you from the get-go. Always expect potential negative surprises, rarely positive ones, to surface later. If you have a negative taste in your mouth from the get-go in your dealings with someone, don’t expect it to get any better with time. Also realize there is a fine line between buying time and procrastinating. Depending on the scenario, if you wait around too long, issues can start to pile up and it can become increasingly difficult to navigate through the compounding complexity. Take enough time to work through due diligence and gain confidence, but once you’re ready to progress with a business deal or relationship, move forward.

Finally, it is important to recognize that we all will make mistakes in our dealings with others. Someone might try to rip you off and have some success, but don’t worry about it too much. Rather than getting discouraged or frustrated, learn from your mistakes and be wiser the next time you encounter similar situations.

Second Set of Eyes: The Value of Redundancy

The idea of redundancy is sometimes associated with inefficiency. However, building in redundancy is often crucial to ensuring continuity and effectiveness in business operations.

Building in redundancy can be applied in various settings, including IT-related backups. A company needs to continue operating if a server crashes or a disaster strikes. Data recovery can only happen if a routine backup (i.e., storing data redundantly) is implemented.

Cross training employees is another area of redundancy. Rather than having only one employee who can perform key functions, build in redundancy by training one or two others. Furthermore, documenting key processes and procedures ensures continuity if a key employee leaves.

Another area for redundancy is accounting and internal controls. For example, have a “second set of eyes” check invoices to customers and payable runs for vendors. Finance professionals, especially accountants who deal with many transactions on a daily basis, get inundated with details and can make mistakes. Having a “second set of eyes” is a great form of redundancy to ensure that mistakes are caught, fraud is prevented, and processes are performed effectively.

Accounting firms are known for hiring young accountants and utilizing the process of reviews as a primary tool for development. Whether the project is a tax return, audit or review, or a consulting project, senior accountants review and mark up the work of the less experienced staff. Not only do the more experienced “second set of eyes” catch mistakes before work products are delivered to customers, but the process serves as a very valuable and enlightening means for younger accountants to quickly and directly learn on the job.

Another opportunity for a “second set of eyes” is with business documents such as contracts and agreements. Small clauses can have large impacts, positive or negative. Take advantage of subject matter experts, such as accountants and lawyers, who can provide a “second set of eyes” to avoid costly mistakes during business negotiations.

Managing Perceptions: The Hidden Value of Policy-Making

We have all heard the expression: “Run it like a business.” Some church leaders try to run their organizations “like a business.” Politicians sometimes speak of running government “like a business.”

So what does it mean to “run it like a business”? When you think of a “real” business, what comes to mind? The essence of how a management team “runs” a business is found in its policies and procedures. These can be formal and written, they can be communicated, and employees can receive training in them. Or they can be informal, ad hoc, unwritten, and generally fuzzy so that employees are uncertain about the policies and procedures. Senior management gets to decide which approach to take on the question of policies and procedures.

Consider the difference between a major league baseball game and a neighborhood game on the sandlot. The stakes are higher — lots of money and pride are on the line — in the majors. The level of care and documentation for policies and procedures (rules), as well as training (for coaches, players, umpires, etc.) is staggering compared to how much thought goes in to an informal sandlot game.

Policies and procedures help set the tone for whether a business is playing in the majors or on the sandlot.

One advantage of carefully thinking through, documenting, and providing training in policies and procedures is consistency. No matter who is handling a particular matter, senior management can be confident that employees who were carefully selected and trained for their roles will reach the proper conclusions and undertake the appropriate actions that management intended.

Another great advantage of a deliberate approach to policies and procedures is not so obvious initially: perception. Employees perceive that management cares and the company is a “real” business when formal, written policies are in place. When employees perceive that management cares, employees take a greater interest in performing their roles effectively. Management sets the top at the top and should devote company resources to training employees in the policies and procedures of the business. This creates a perception of organizational soundness and stability among employees. Also, employees can confidently communicate with customers, vendors, and other stakeholders about the company policies. Employees need to know how the company does business. This sets a tone for managing business relationships.

Perhaps management wants to provide guidance and boundaries but also wants to give employees leeway to use their judgment. An employee can articulate a variation of the following: “Company policy says X, Y, and Z regarding this situation, but I have discretionary leeway built into my role so that I can use my best judgment and diverge from company policy just this one time for your benefit” (usually these are the words of a supervisor, not an entry-level customer service rep). In this scenario the customer perceives that the company is doing something thoughtful and gracious by making a one-time policy exception.

The other option is to give no guidance on policies and procedures and leave it up to the individual handling the matter to navigate through the complexity. An inexperienced employee might say, “I think a 90 day return policy for a used and abused item is reasonable.” This might avoid a conflict with an unreasonable customer, but it is not a good policy. Even when the customer gets its way in this scenario, the customer walks away with no perception that the company is a “real” business. The company has not done something thoughtful but has been manipulated by an unscrupulous customer. The scenario is a joke, not an opportunity to build customer value and loyalty. The matter could have been settled by senior management beforehand by setting sound policy and training the employee accordingly.

Again, this responsibility falls on senior management. When employees have no policies and procedures to follow and make inevitable mistakes, management has no one to blame but themselves. The tendency more often is to blame the employee that did not do it management’s way — even though management never bothered to communicate to the employees how the job should have been done.

Not only do employees, customers, and suppliers have a better perception of the business when policies are in place. Policies and procedures affect the perceptions of other stakeholders. Even regulatory agencies in certain cases can consider a company’s compliance policies, procedures, and training as mitigating factors for penalties when unintentional regulatory noncompliance takes place. Again, perception is a massive benefit for a company in this scenario, as compared to having no policies, procedures, and training — which can be expected to lead to regulatory noncompliance due to management’s negligence.

Several areas for policies and procedures include (but are not limited to) the following:

  • Accounts receivable, credit, and collections
  • Accounts payable
  • Human resources (the subcategories here are vast)
  • Customer service
  • Tax and regulatory compliance
  • Any other area that involves risk or requires judgment and discretion

Position your business for success by setting policies and procedures. Train your employees to comply. Drill this into them at every opportunity and set an example. This will set up your business to compete in the majors rather than on the sandlot. Every individual and organization that interacts with your business will have a better perception that your business is “run like a business” and is a “real” company rather than a joke.

No Exceptions: Five Reasons to Get Your Agreements in Writing

With a written agreement,
You have a prayer;
With a verbal agreement
You have nothing but air.

-Robert Ringer

Everyone in the business world will have an opportunity, at one time or another, to make a verbal commitment and shake hands to “seal” an agreement. However, as all savvy business participants learn, there is no exception to this rule: “Get it in writing.” Here are five reasons to never diverge from this simple rule:

      1. Why not? That’s right: Why not get your agreement in writing? I cannot contemplate a situation in which it would be unfeasible to commit an agreement to paper (or electronic form, if appropriate). There is no legitimate reason to avoid putting an agreement in writing. You have nothing to lose and everything to gain (see below), so just do it.
      2. Following up on the above point, there certainly are illegitimate reasons that someone might refuse to put an agreement in writing. One or both parties might not intend to follow through on the agreement (or they might want the option of an “escape” in case following through becomes challenging). That said, in most cases — from a legal and ethical standpoint — an agreement is an agreement, whether verbal or written. (Disclaimer: Consult an attorney, as this is not to be construed as legal advice). Even so, it is all too easy for one of the parties to say, “I never agreed to that. Prove it.” If you have nothing in writing, it will be your word against the other person’s word.
      3. Even assuming that all parties to an agreement are bargaining in good faith, fully intending to follow through with their commitments (and this is certainly by no means a given), getting an agreement in writing provides clarity on the specifics. Although it is possible to misunderstand a written agreement due to ambiguity, how much more unclear could a verbal agreement be, especially months and years after the fact.
      4. Requiring agreements to be in writing positions you as a careful professional who wants to make sure the interests of all parties are well served. This will make you attractive to business colleagues with a similar interest in integrity. As a bonus, it will make all the others think twice about doing business with you, knowing that it might be hard to pull a fast one on you.
      5. Written agreements are legally required for some contracts. And even when not technically required, written agreements can provide the best evidence of what the parties intended. Again, consult an attorney since this is not to be construed as legal advice.

If you have learned this lesson the hard way, you need no further convincing. If you have yet to learn this lesson the hard way, be grateful. Simply make a commitment that you will always follow this rule with no exceptions — no matter how compelling an offer might be from someone who refuses to put the agreement in writing. There is a reason they are refusing, and you can easily call their bluff by standing firm with your requirement to “get it in writing.” If this forces a no-go decision on the deal, you can move forward to the next opportunity knowing that you have spared yourself a lot of wasted time and resources.

Three Ways to be a Savvy Finance Professional

Every now and then an “opportunity of a lifetime” will arise in your personal or professional life. How do you discern whether these situations are the “real deal” or “too good to be true”? Here are some tips I have compiled, which are drawn from reflecting on valuable lessons from classes I have taken in the “school of hard knocks.”

  1. Don’t believe everything you hear. “Well duh,” you say. In theory, this principle seems simple enough. In practice, it is all too easy (if we’re not careful) to let ourselves be bamboozled by slick and smooth blowers of smoke. Savvy finance professionals learn not to be dazzled by ostensible brilliance or baffled by indecipherable nonsense. This leads to our second point.
  2. Evaluate evidence and look for proof. If the sales pitch for this “opportunity of a lifetime” doesn’t make sense, be intellectually honest with yourself about this. Here’s a simple rule: Never pursue a product, job, or other type of situation that you do not understand. It is easy to become “desperate” to jump into something you don’t understand when you are driven by greed or fear. Therefore, you must maintain integrity and not get wrapped up in destructive emotions. Also, use your creativity to develop other opportunities for yourself so that you have “walkaway power” rather than allowing yourself to cast aside your better judgment and jump headfirst into a “too good to be true” scenario.
  3. Develop “professional skepticism.” This is a principle from the audit profession. Young auditors must learn to dig into the subject matter and understand the numbers for themselves rather than subordinating their judgment to the client or even to senior auditors. You have your own mind, and you must take ownership of your thoughts rather than letting someone else program your evaluation process. Too many shady operators get away with shenanigans when others are afraid to question the so-called “wisdom” of experienced “experts.” But if you want to be a savvy financial professional, you should be willing to take scorn much like the little boy who declared the “emperor has no clothes.”

Following these tips is not easy. You have to learn to use uncomfortable words and expressions, such as: “No” or “Prove it.” Or sometimes you have to humble yourself and make the dreaded admission: “I don’t understand.” But you will add value to your jobs, your career, and your relationships if you bring intellectual honesty to the table. “Nail everything down” rather than letting yourself be manipulated into pursuing a disaster, cleverly disguised as an “opportunity of a lifetime.”

Regulatory Compliance is a Requirement, Not an Option

Among the best ways to get your business into irreparable trouble, not paying taxes (especially payroll taxes) and breaking the law have to rank near the top. Sometimes noncompliance with laws and regulations is simply a matter of indifference. However, ignorance is no excuse, so business leaders must be proactive with compliance programs and training. Such programs and training give evidence of due diligence rather than negligence, which can mitigate consequences for unintentional noncompliance.

Various local, state, and federal agencies have literature and resources to help companies stay in compliance. Especially within small and mid-sized companies, this compliance role is a control function that often naturally falls within the accounting and finance group.

Many companies find themselves doing business abroad, and the US Customs and Border Patrol has a Trade Compliance site, and the Census Bureau has Export Training. Each industry has its own sets of laws and regulations — including environmental, health and safety, and HR-related, to name just a few categories — and a busy finance professional probably cannot expect to stay on top of every detail and change. Thus, outside compliance professionals can provide systematic and ongoing support, often for a reasonable fee. That said, a finance professional needs to know the broad categories of compliance that need to be monitored on an ongoing basis, as well as red flags to look for. This is integral to an effective enterprise risk management program.

The best compliance initiatives and training programs are ongoing, proactive, and systematic. If you want your business to survive and thrive, compliance is a fundamental requirement, not an option, for every person and group within an organization. Senior management sets the “tone at the top” for zero tolerance of regulatory noncompliance.