What to Do When an Employee's Actions Lead to Financial Losses?

Entrepreneur Ilya Rybalko, owner of a stage equipment distribution company, asked an important question on my blog: how to react to employee errors that cause direct financial losses for the business?

His situation involves two cases: one related to a missed lawsuit, the other to an overspending of the budget on a marketplace. Both cases clearly demonstrate the systemic problems that managers face.

Case 1: Forgot to File a Lawsuit, and the Fee Tripled

In August, the company decided to go to court. The financial director suggested starting the process, the manager agreed, and a state fee of $480 was paid. However, a month and a half later, it turned out that after payment, the receipt was never sent to the lawyers, and the lawsuit was not filed. During this time, the legislation changed, and now the fee is $1440. To file the lawsuit, it is necessary to pay an additional $960.

The manager was faced with a choice: distribute the expenses between the employee and the company or fully cover the costs from the business. The situation is unpleasant, but at the same time very telling.

Employee Errors Are Inevitable. The Most Expensive Ones Are Made by Owners

Mistakes happen in any team. They are made by specialists, managers, and even the owners themselves. Moreover, it is at the owners' level that the cost of errors is highest: missed deals, incorrect management decisions, untimely actions. All of this can cost the business much more than $960.

I like to cite Harvard Business Review statistics, which show that up to 50% of all strategic decisions made by top management and business owners turn out to be wrong and lead to financial losses. Everyone makes mistakes.

Therefore, an ineffective management approach is to punish employees for every mistake, especially for showing initiative. This leads to a decrease in engagement, an increase in fear, and a rejection of independence. The team stops taking responsibility and waits for instructions from above.

Weak Processes Are More Expensive Than They Seem

The situation with the lawsuit did not happen because the person deliberately violated the process. The mistake was a consequence of the lack of a built-in control and financial planning system.

According to a McKinsey study, more than 70% of operational losses in medium and large businesses occur due to deficiencies in management processes, not due to employee dishonesty. If the company had a budget approval mechanism involving the board of directors, the issue of allocating funds for the fee would have been considered collectively, recorded in the reports, and the initiative itself would have remained under control.

As part of such a process, one of the participants in the discussion would certainly have clarified the status of the lawsuit filing, deadlines, and results. This would have avoided wasting time and additional expenses.

Case 2: Marketplace Budget Overrun

In the second case, an employee responsible for advertising on the marketplace launched a campaign on Friday, went away for the weekend, and on Monday it turned out that $2160 had been spent, $1440 more than the allowed budget. On Tuesday, he independently reported the error.

The proposed solution was to withhold 25% of the overspending from the employee's salary, with the rest being compensated by the company. This approach seems like a compromise, but it can have long-term consequences in the form of reduced trust and motivation.

It is important to note that the employee did not misappropriate funds; he acted within his area of responsibility but made a mistake in budget management. In such a situation, it is much more effective to conduct an analysis and record two management outcomes:

1. A compensation program through the achievement of specific results. For example, an increase in sales next month. Use my "Sales Technology" guide, which will help with this:https://go.bbooster.online/6xci
2. Conducting a joint analysis: how to change the process to prevent similar situations from recurring.

Such actions foster a culture of responsibility while preserving initiative and respect within the team.

Management Conclusion: Fines Do Not Solve Systemic Problems

Imposing sanctions for every mistake is a path to fear and stagnation. In my 30 years of business experience, I can say with confidence that the implementation of management processes and financial planning leads to stability. When a system of discussion, approval, and control of expenses operates within the company, such errors become rare.

Financial planning is not just a tool for managing money. It contributes to increasing the management maturity of the entire team. In companies where managers independently make budget decisions, justify their needs, and are responsible for the use of resources, such situations are resolved within the company. They do not reach the owner.