The Three Best Ways to Screw Up your Business

 

This article is for the budding entrepreneur who has an idea and a dream but very little practical business experience. It’s not so much an article about what to do, but rather, it contains advice about what not to do.

This advice is taken from my own personal and professional experience, so do with it what you will…

 

Screw Up #1: You Trust Your Employees

Photo credit: Hermes Rivera

This is an easy trap to fall into — when you and your staff are working together as a tight knit unit, it’s easy to let yourself become friends with your employees. Eventually, you may get to a point where you may trust them absolutely.

My advice is this: hire good people, invest in their training and leave them alone so they can do their jobs — but never trust them absolutely.

I’m going to share with you an anecdote from my professional practice so you understand how bad things can get when you trust the wrong person.

The “Nice Person”™

Photo credit: Nathan Lemon

I had a client who was (and still is) a very successful electrician in Toronto. He had his own company which was incorporated. Let’s call him “Ted” (not his real name).

One of his employees was a lady who was his office manager and bookkeeper. Let’s call her “Sandy”. She was diligent, responsible and kind — a perfect employee and the quintessential “Nice Person”™.

She was essentially his right-hand woman and he trusted her absolutely to run things for him at the office while he was out and about the city performing electrical work. In addition to doing the bookkeeping, Sandy was also in charge of collecting cheques from customers and depositing the money into the company bank account. This was a big mistake as we’ll soon see.

During the years that Ted and Sandy worked together, Ted was doing a lot of electrical work and billing a lot of invoices to customers, but he never seemed to have enough money left over to pay himself after paying the company’s bills (rent, wages, utilities, etc.). He finally hired an accountant to look into the books. The accountant discovered that: (1) there was a lot of money missing; and (2) Ted’s company had a massive payroll tax debt of $470,000 owing to the Canada Revenue Agency (the Canadian equivalent of the IRS in the U.S.).

What was worse — since Ted was the director of his corporation, he was personally liable for this $470K.

Both Ted and his accountant eventually determined that over the years, Sandy was siphoning money little by little from the company. Once they documented enough evidence, they filed a report to the police. The police conducted their investigation and eventually arrested Sandy. She was subsequently convicted and sent to jail.

Ted was referred to me by his accountant. With my assistance, Ted filed his company into bankruptcy. However, Ted wasn’t out of the woods yet — he was still personally liable to the Canada Revenue Agency for the $470K.

Lucky for Ted that he filed a police report. He retained a lawyer who used this police report as a defence to absolve Ted of any personal liabililty for the $470K.

Ted got out of this situation relatively unscathed because he acted quickly in filing a police report. Had things turned out differently, he could have been required to file for personal bankruptcy, because he certainly didn’t have $470K sitting around at home. He could have lost everything, including his home.

After it was all over, Ted incorporated a new company and continued his electrician business. And he got smart: he hired his wife to be the new office manager and bookkeeper.

Ted could have avoided finding himself in this nightmare scenario in the first place by not trusting Sandy absolutely. What he should have done was implement a concept called “separation of duties”. Specifically, Sandy should have handled the bookkeeping and somebody else should have collected the cheques and deposited them in the bank. This would have greatly decreased the risk of fraud.

But of course, if you’re a small business or a startup, you might not be able to afford to hire several employees and divide tasks among them. You might be only able to hire one employee and assign her to do everything for you. If this is your situation, then it’s best that you apply the old Russian proverb:

Lesson learned: “TRUST BUT VERIFY”

Screw Up #2: You Take on Debt at the Wrong Time

Photo credit: Ruth Enyedi

 

There is a misconception among the general public that debt is bad. That is incorrect. Debt, when used properly, can make you wealthy. It’s only bad if you use it at the wrong time. Which leads me to my next anecdote.

The Business Geniuses

Photo credit: Jeshoots.com

Years ago, I arrived in Toronto on Halloween night eagerly anticipating my first day at work the following morning. A debt management firm had hired me the week prior and it was my first real job out of university. I had no experience whatsoever, but the owners of the firm undertook to train me.

Their operation was very impressive: they were the largest such firm in Toronto at the time and had a 20% annual growth rate. During that time, Canada, and Toronto in particular, was undergoing a severe economic downturn. Therefore, being in the debt management industry was one of the best businesses to be in.

They also spent a lot of money on advertising.  From what I understood, management was spending hundreds of thousands of dollars in advertising per year.

And of course, to handle all these files they were taking in (at their peak, they had about 100 filings per month), they opened up many offices all over the GTA and hired a lot of staff.

For the next few years, the practice did extremely well and the owners had become known in their industry as being business geniuses. And the growing debt wasn’t a problem because the client files kept pouring in – the bank was happy.

The owners were so confident that the good times would continue that they subsequently made a decision to expand the business to Vancouver, British Columbia. So they borrowed even more money from the bank to finance the hiring of staff, the leasing of office space and payment for lots of advertising on the West Coast.

By the time the West Coast office opened its doors and started operating, the firm was millions in dollars of debt. Moreover, the Canadian economy started improving.

And as the economy improved, the firm’s client filings started trending downward very rapidly. In other words, the owners expanded their business by taking on more debt at precisely the time client filings stopped coming in.

The inevitable happened — the firm could no longer pay its operating line of credit and went into default. The bank obtained a bankruptcy order from court which forced the firm into bankruptcy. I became unemployed along with all my colleagues in the Toronto and West Coast offices.

If you’ve been reading this anecdote carefully so far, you’ll note the following classic business mistakes made by this firm:

  1. The firm had great success for a few years and assumed that it would continue indefinitely. That is, the management was projecting past and present success into the future.
  2. Expecting the good times to continue, the owners got greedy and borrowed too much money at the wrong time in order to expand their operations.

Lessons learned:

DON’T BE GREEDY when making a business decision. It may lead you to taking on debt at the wrong time.

DON’T ASSUME that what is successful today will continue to be successful in the future. If there’s one thing you can learn from this experience is that “An assumption is the mother of all fuck-ups.”

Screw Up #3: You Let Office Politics Get Out of Control

Photo credit: Ben White

Office politics is an inevitability in any work environment. It usually consists of relatively harmless gossip and oneupmanship among employees. However, as a business owner, you need to monitor this so that it doesn’t get out of hand.

So what can happen when office politics gets out of hand? This leads me to my next anecdote.

Winding Up Some Office Politics

Photo credit: Jason Rosewell

Many years ago, I was part of a team of professionals responsible for the unenviable task of winding up a women’s shelter in Toronto. This particular women’s shelter operated under a corporation.

In legal speak, “winding up” a corporation essentially means its dissolution. Activities in the wind up includes selling all assets, paying off creditors, and distributing remaining assets to the shareholders. In the case of this women’s shelter, the shareholders included the City of Toronto and other levels of government as well as the United Way.

Why was this women’s shelter wound up and dissolved? The reasons weren’t financial — it had plenty of money in its bank account since it received plenty of funding from its shareholders. It also served a very urgent need in the community — the sheltering of battered and abused women in Toronto.

The reason for the wind-up was as follows:

  1. The front line employees that worked with clients (i.e., women in need of shelter) consisted exclusively of women from marginalized communities — women of colour, gay women, and transgendered women.
  2. The corporation’s Board of Directors consisted exclusively of educated, upper-middle class ,straight, White women. They volunteered their time to sit on the Board and as such, were charged with assessing the overall direction and strategy of the shelter.
  3. For whatever reason, identity and office politics got so out of control that relations between the Board (all White and straight) and the front-line staff (all racialized, gay or transgender) became dysfunctional. Staff wouldn’t take directions from the Board and were accusing it of discriminating against gay, transgender and racialized people.
  4. It got to a point that members of the Board made a decision to dissolve the corporation and the women’s shelter’s operations, since the shelter could no longer operate in the normal course. The work environment became much too toxic.

Being the relatively naive young lad that I was, I was taken aback by the absurdity of the situation: how could a women’s shelter with plenty of operating funds just shut down and fail the most vulnerable members of our society? Because a group of adult women couldn’t resolve their differences to fulfill a noble mission? Because the Board didn’t have a firm enough hand in shutting down the bickering?

But I have since learned that, yes — turbulent office politics can lead to the destruction of even the most noble of life’s undertakings: to help people in need.

Lesson learned:

SHUT DOWN toxic office politics before it gets out of control

Share Your Story

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So there you have it — my three best ways to screw up your business. Do you have any stories to tell about your experiences? Please feel free to share them in the comments section.

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