Stupid management mistakes

I was just chatting with a friend who is a little concerned about her job, and she should be.

One of the biggest mistakes management makes is allowing overhead to spiral out of control.  It is really crazy, but, once overhead starts spiraling out of control, bad management will usually cut expenses primarily in profit generating areas and maintain unprofitable support structures.

Look at Sears, Chrysler and American Motors.  All were doing fine, until they bought huge mega-headquarters and screwed themselves by increasing overhead to the point where they couldn't generate enough profits to cover the overhead.

At a company I used to work with, we had three divisions, mine, Ricks and Dena's.  Ricks wasn't making a profit, but, management believed they would eventually (bird in the bush) so even though Dena's and my divisions were creating cash flow, they cut resources for us and gave them to the people who were not generating cash flow in excess of their costs.

This sounds stupid, but, bad management will often try to restructure profitable areas while maintaining unprofitable areas of the company.

Always cut the non-cash flow generating portions of a company to the bone.  Don't mess with the parts of the company that are generating cash flow.

This is a big deal.  Anything that is not generating cash flow becomes a burden.  Book keepers, accountants, janitors, secretaries, empty office space, executives.

The next one is harder, what contributes to cash flow?  The controller of the company I used to work for had us going to the office manager to get pens and legal pads towards the end.  My cost to the company was like $2 a minute, it literally doubled the cost of a pen and paper for me to go through the office manager.  Did that process of doubling the cost of pen and paper save money?  No idea really, but, I doubt it, unless there are thieves stealing them and taking it home for their kids.  As much as I used my computer, cell phone, white board, etc, I still use paper and pen occasionally because it helps me think to draw out a flow diagram.  I'm kinesthetic so holding stuff helps.

Look around the company, and they messing with cash flow generating employees?  Sales, production, shipping, programmers, etc and leaving the office alone for the most part, the accounts, secretaries, executives, office space, etc?  Are there divisions that are not generating enough cash flow to pay for themselves?

This is tricky, can a division pay for itself, but, not the corporate overhead?  For example, suppose there is a plant that is generating enough to cover it's own costs, but, only covers 25% of its share of the corporate overhead.  Bad management will shut it down or restructure it to try and pay for the bloated overhead.

If they shut it down, percentage of overhead that the rest of the company pays for increases.

Say there are four plants, one corporate head quarters.  Each plant generates 2 million in revenue.  Corporate costs 2 million to run.  3 plants cost 1.5 million to run.  1 plant costs 1.75 million to run.  The corporation is losing 250K per year.

Close the plant that costs 1.75 million, their costs are too high, Chinese competition is killing us!  Now the corporation is losing 500K per year.

Ok, so lets restructure the plant to reduce costs.  Now the plant only costs 1.5 million to run and it only generates 1.8 million in revenue.  Now the corporation is losing 200K per year.

I have a better idea, cut that $250K from head quarters first.  Then restructure the plant.

Here is the key, and it is pretty easy.  Look for the variability.  If the cash flow is variable, that is the problem.  If the time it takes to generate cash flow is variable, that is a problem.

The problem is always overhead and failure to manage that overhead.