During the Texas oil boom of the 1980s, I was contacted by a company (I’ll call it Grant Corp.) to help get its finances in order. I walked into a financial meltdown and in the course of my work uncovered a slew of management errors — and even some full-on deceit and treachery — that was bringing the company to ruin. (You can read about the background of this company in my first post in this series.)
The Problem: Information Silos
As I mentioned in my previous post, during interviews with the presidents of the pipeline and the exploration and production divisions, I discovered a common frustration. They complained that vendors who provided office supplies were being paid ahead of vendors who serviced field operations and were critical to continued revenue producing activities. The chief financial officer was making decisions unilaterally without seeking the presidents’ input.
The Solution: Better Communications
I recommended that we create a committee, to include both presidents, that would meet weekly to allocate available cash to pay vendor bills. With the agreement of the chief executive officer we had our first meeting. The CFO declined to attend. With this committee we accomplished three objectives. We improved morale by giving operations managers significant control over the allocation of scarce resources to meet their needs. We minimized the possibility of interruptions in our revenue stream from denied services. We also built trust and mutual respect amongst the team members. (We subsequently discovered that the CFO was soliciting kickbacks from home office vendors to pay them at the expense of more critical vendors in the field. This is part of a larger story for a later blog post.)
There were other communications problems. One of the most common was a failure by senior executives to keep the organization abreast of deals or pending deals. We began to have regular executive committee meetings to keep senior management abreast of important developments.
Another important issue was control over vendor expenditures. My accounts payable manager told me this story to illustrate the point. One of our in-house attorneys had called him, irate that one of her vendors hadn’t been paid. Donald searched, without success, for the invoice in the accounting system. He couldn’t find it among invoices yet to be entered, so he asked the attorney if she might know where the invoice was. She responded, “I have it right here on my desk!”
Several weeks later, the president of the pipeline company confided in me his concern that a vendor invoice hadn’t been paid. He wanted to give me an opportunity to find out what the problem was without making a big deal of it. It turned out that his secretary found it buried on his desk. We were friends and both had a laugh, but I realized it was time to solve the problem.
I hired a programmer to create an invoice tracking system. All incoming bills were opened by the receptionist, logged in to the system, and logged out and routed to the party responsible for approving payment. We disseminated a regular report that included all invoices logged in to someone’s office for more than three days. This didn’t just give us better control over the processing of invoices. It gave us more current information with which to predict cash flow.
Next up: lower-cost, better reporting with the right accounting software.