How Assets and Liabilities Affect Your Business's Cash Flow
Types of Dividends
How to Find the Right Tax Forms for Your Small Business

Letting Relationships Influence Finances Can Be Ruinous

The idea that whom you know is more important than what you know holds weight all over the world. In Chinese, it’s called guanxi, in Arabic, it’s called wasta, in Russian, it’s called blat, but it all means the same thing: showing favoritism based on personal relationships rather than merit or qualifications. This form of favoritism is called cronyism (or nepotism, when you’re dealing with relatives).

Basically it works like this: You’re in charge of something at your company, and you make decisions to spend money on goods and services based on the personal relationships you have with people rather than their merit compared to those competing with them.

Maybe you’re in charge of hiring or you know someone who is, and you push for a particular person to get hired based on the fact that you know her and you want to maintain good relations with her or you think working with her would be fun.

As a result, wages may be paid to an employee who has lower productivity and less potential to contribute to the company in the long-run compared to other candidates. Or maybe you’re in charge of procurement and you purchase supplies from the company where one of your family members works because you trust them over someone you don’t know.

In this case, you may end up paying more for the company’s supplies either by simply accepting the higher price or by not performing a full evaluation of market prices and quality.

Cronyism isn’t the same as networking. Although you’re attempting to do business with people you know in both cases, in networking, you’re attempting to use social opportunities to find people who can benefit your business. In cronyism, you’re looking to use professional opportunities to benefit your social connections.

Preventing cronyism from occurring in a company is relatively simple at all levels of management except the highest. You just have to require individuals to use predetermined evaluation criteria when making important decisions and then hold them accountable for proper recording and analysis using that criteria.

Doing so helps a company maintain a business network based on quality, price, and other forms of merit rather than personal relationships, thus improving financial performance at all levels and across all departments.

blog comments powered by Disqus
Diversification Can’t Completely Eliminate Risk Exposure
Flow of Credits and Debits in Double-Entry Bookkeeping
Calculate Breakeven Points in Your Business
How to Use Future Earnings and Cash Flow for Asset Valuation
How Corporate Finance Rules Your Life
Advertisement

Inside Dummies.com