(Third of a series)
When management is weak, it is prone to commit errors that can lead to the company’s decline. This is the third article in a four-part series about our findings on Co A, which displayed many telltale signs that were largely ignored by the company.
Collectively, the lack of management depth and the autocratic nature of the founder impacted the organization. The global financial crisis and the aftermath were just the coup de grace that ended it all.
To begin with, the company’s internal system was already chaotic even before the crisis. Functional conflicts and turf wars among departments were a regular occurrence.
Aggressive pre-selling was the order of the day. Objectively, there is nothing wrong with a selling frenzy culture in a real estate organization. What was functionally wanting in Co A was the fact that accounting, customer service, and sales administration–three mission-critical departments–were neglected by the leadership team.
SELLING CULTURE, POOR AFTER-SALES SERVICE
Aggravating the fragile state of Co A was the notoriety of the sales group in demanding concessions. They pushed for stretched payment terms that were inordinately high, translating to additional costs and effectively compromising margins.
Equity or downpayment, which is usually lumped with the reservation fee, was scrapped as sellers elected to offer to more liberal deferred cash payment terms. They also demanded for higher commissions and incentives, further trimming yields.
Generally, departments outside finance and accounting do not know the impact on profits whenever there is an increase in sales-related expenses. On paper, the terms of payment look competitive and market-driven but the inadequate financial state and lack of accounting controls proved too much for an organization that evolved on a topline kind of business model.
We also discovered a pattern wherein the founder and finance team resorted to creative accounting to cover up the real numbers. When we confronted the finance head, he brushed it aside as part of his regular function.
From my experience in turning around businesses, creative accounting is synonymous with fraud. That is why when we made the report, we explicitly highlighted that “not having a strong finance person is dangerous.”
We also concluded that Co A’s head of finance and accounting was not capable of providing reliable data to the management. He not only lacked experience and technical skills, but he also did not have the courage to stand up to the founder’s style of issuing imprudent orders. He simply was just an order taker who failed to adhere to his oath as an accountant, “to tell everyone in top management how the business is doing, nothing else.” In short, there was no full disclosure.
Here are our other findings: a. An extraordinary high altered attrition rate of more than 50 percent (5. 3 out of 10 homebuyers backed out). Generally, in good times, the industry attrition rate hovers around 8 percent to 12 percent; in bad times the average spikes to 40 percent owing to external events like illness, loss of jobs, and pay cuts.
b. Out of the 5.3 buyers who backed out, 40 percent returned their units because of poor customer service. Unknowingly, developer neglect in handholding homebuyers and showing poor service translates to buyer exasperation and frustration. eventually leading to sale cancellation.
c. The biggest losers were clients based overseas. When concerns were being ignored, it was just a matter of time that an exodus of frustrated homebuyers started to pull the plug, foregoing reservation deposit, and amortization.
In my experience, developers treat their customer service department as an added cost center and dismally brush any additional request for a fully integrated service development infrastructure. When we reviewed Co A’s process flow, we discovered that front-liners were poorly trained, ill-equipped and employee turnover was high. The management’s passive response reflected the founder’s wrong priorities.
GROWTH AT ALL COST
Every property developer subscribes to a mindset that every company has to keep growing. The quote “If you stand still, you die” does not follow. It is an irresponsible statement and should never be embraced as gospel truth.
When your company hits a flatline in earnings, it is probably time to look around and institute some form of risk assessment. The concept or projects you are carrying might no longer be sustainable or the segment where you are in may have been disrupted by new entrants. You may need to start pivoting to some untapped spaces and discover a whole new direction.
In the case of Co A, despite experiencing internal constraints and people problems, it went on to commit its biggest mistake: overexpansion.
It carried the misconception that the only road to success is through growth. Growth without science and the right set of plans is vanity bordering on delusional. Misdirected growth egged on with the lack of operating controls is like heading to the forest without water and compass.
So when the global financial crisis made its way, Co A fell victim to overexpansion. Its debt load accelerated its decline.
As we wait for COVID-19’S hard landing in the next couple of months, it is important for stakeholders to learn from the series of mistakes that the leadership team of Co A committed almost blindly.
High leverage is a warning signal that no one should ignore. Poorly managed companies tend to leverage their equity beyond the prudent level. When an event in the magnitude of the current crisis turns up in the cycle, we can almost expect the beginning of the end for organizations with weak management.
(To be continued)