Management Deficiencies

Management Deficiencies

Background

Numerous studies conclude that management deficiencies are the single most critical explanatory factor in business failure. According to one author, the most critical management deficiencies are the following:

autocratic chief executive;
no strong finance director;
executive skills are not well spread;
directors do not actively participate; and
the chief executive officer is also the chairperson.

When combined with financial system defects (such as ineffective budgetary control, inaccurate costing systems and poor cash flow planning) and ineffective management of change in response to environmental change, these management deficiencies can prevent an entity from effectively anticipating, responding or adapting to changing business conditions, and set it up for making one of three critical mistakes:

growing too fast;
taking on a project of such magnitude that, if it fails, will bring the entity down with it; and
taking on the maximum amount of debt, leaving no room for further financing.

While it may appear overly simplistic to cite management shortcomings as the major cause of most business failures, the literature repeats this assertion so frequently that it is noteworthy. Particularly noteworthy is the suggestion that other often-cited causes are, in fact, infrequently the culprits. According to one author, 70% of business failures are attributable to management shortcomings, of which the major identifiable component is the absence of any serious planning and control.

Note

It has been suggested that it takes an entity's financial data one to three years longer to indicate problems and weaknesses than would be available from a direct assessment of soft factors such as management skill. This type of information is generally omitted by financial distress prediction models based on publicly available financial information, but can be observed by auditors.

Use

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