When Disaster Strikes
I suddenly became aware of everything— the rumbling of the cars on the street, the metallic clicking of the magnetic door, the dusty smell of the three year-old carpet. Most of all, I was acutely aware of the fact that no one in the room was breathing.
Our financial manager—we’ll call him “Peter”—just admitted to us that he failed to stay enrolled in Alcoholics Anonymous. While we didn’t know it at the time, his admission was the precursor to a financial meltdown that nearly crippled our company. When we hired Peter, he helped turn the finance department around. Within three months, we were getting management accounts out four days after month’s end. Our previously erratic monthly profit and loss was now a consistent profit, and ou cash flow looked to be stabilizing after a long start to the business. So while we were aware of Peter’s disease, we believed he had it under control. Unfortunately, we didn’t put in the time and effort to curtail his powers.
After hearing the news, we decided to investigate his actions, assuming his inability to effectively do his job impacted the financial identity of the business. We quickly discovered that he had been hiding creditor invoices for more than six months, and had been operating a suspense account where he would post adjustments to the general ledger and inflate our management accounts, making us think the business was in a great position. We didn’t know the extent of the problem, and I was deployed to run the finance department until we could figure out a recovery strategy … or shut down the business.
In the initial damage assessment, we uncovered hundreds of thousands of dollars in outstanding creditor invoices and uncollected, unpaid debtors. I decided to employ a working capital strategy and focus purely on creditors and debtors. The executive team committed to reducing expenditures, focusing on cost controls by restricting the signing authorities of all managers and reducing staff costs and supplier relationship management. We addressed the financial situation, but still had to reverse the remaining damage done to the rest of the business.
To further remedy the situation, we assessed the impact the crisis had on our stakeholders. We then outlined what we wanted to achieve and by when, with respects to our finance and legal department, clients, suppliers and staff. Afterward, we assigned key people to manage the situation, communicated the plan to all stakeholders and frequently reviewed our progress relative to our target result. All of these measures enabled us to turn what could have been a business-ending event into a lean, better run and more profitable business, but it wasn’t without its errors.
Looking back, we made some key mistakes. For example, the decision not to share what was happening in the business with our management team created tension between us and them. Also, we didn’t remove the problem immediately. Until Peter could prove that he wasn’t a liability, we should have suspended him from his duties. Finally, we weren’t honest with ourselves about what was happening, and we didn’t prepare ourselves for a very painful and humiliating period. In the end, we had to write off almost two percent of our income and more than 90 percent of our profits, but the real damage was done to our relationships with suppliers, staff and management.
As a company, we have been through many trying times, but this one tested the foundations of both our business and our character. We learned that life will always place challenges in our path to success, but that the mountain only seems insurmountable when we look at it from the bottom. When faced with a crisis, we learned to reframe the challenge so that we always keep the perspective in mind as we’re clawing over the next obstacle. What defines us is how we act when we’re down and out. In the end, we are better leaders because of this experience.