Credit Matters Blog

What Is Your Broken Business Window?

Kim Radok 19 August 2013


The theme of this blog is to take the broken window theory from the urban neighbourhood setting and see if the principles apply in the business environment. In the business environment, the potential for what I call "broken business windows" creates the same sort of problems as for the urban neighbourhood. The results of which are the wrong sort of suppliers and customers are attracted to your business. I have put forward a number of concepts for your consideration.

In the urban setting, we see evidence of physical neglect which encourages the criminals, drug pushers and vandals to move in to the neighbourhood. The problem we have in the business environment, there is usually little physical evidence of the broken window theory. Consequently we may not see the business broken windows until it is too late.

Book figures can hide a lot of broken window concepts if the figures are not presented, managed and read properly by management. Unfortunately, too often management only sees what it wants to see, not what is actually going on in front of them. Consequently management may not be "forced" in to thinking about what the figures are actually telling them and how they impact on the business in a meaningful manner.

Let us look at two situations from the Debtors Ledger for example.

Example 1 Nothing is easier in hiding problems in the Debtors Ledger if management only looks at the percentage of outstanding debt in the 90 and 120 day figures. For example, management may become use to seeing percentages of the Ledger outstanding at 5% or 10% of the total outstanding are in these sections and this is okay (whatever that means).

Example 2 The lazy or naive accounts person  that allocates payments to the oldest parts of the Ledger or customer accounts rather than allocating remittance advices properly. This may make the Debtors Ledger look rather good. Unfortunately what is really happening is all the unpaid invoices and unprocessed credit claims are accumulating because no-one can see them building up.

Sales and purchase frauds occur because of collusion between salespeople and customers. One indication of potential problems is to create awareness of how credit claims occur. However, and problems will not be found if there is no way of measuring the amount of credit claims and action taken to ask questions about why the claims occur in the first place.

Sales frauds occur because of special deals and offers which are said to be signed off by customers. In fact, the orders are fabricated just before the salesperson leaves the firm and they receive their commissions. Afterwards, management is not willing to follow up and reclaim the lost commissions and goods because it is too "embarrassing", "costly" or they "don't have the time".

The lack of written procedures and resources mean salespeople are able to sell what they like when they like, customers raise credit claims which are only processed under sufferance, and enquiries are not dealt with promptly, etc.

"The trusted employee" is trusted too much, never takes holidays and there are no cross-checking procedures to ensure they are not stealing from the business. If funds are stolen, it usually because management has been unwilling to spend the money to ensure these situations are monitored or to have back-up personnel available.

A lack of resources, motivation and treatment by management of customer service operatives, often results in a bad organisational culture, poor customer service ethos where customers are treated badly, important deadlines missed etc. In other words, the customers' first impression is one of a lack of care and detail. The customer then either ceases doing business with you or exploits the situation to their advantage.

These and other "organisational broken window examples" lead to disenfranchised employees and customers or fraud attempts by the same people. In other words, the criminals, drug pushers and vandals from the urban neighbourhood example, have moved in to your business environment.

If you wish to operate a profitable business, and whether you call it a business process review, or a check for your "businesses broken windows", these reviews are well worth doing from time to time.

May you be paid today rather than tomorrow

Kim Radok