Leaders – praised when the going is good, and a quick scapegoat when the challenges come. Critical to any successful organisation, a strong leader sets the tone, motivates employees, and navigates the business towards success. However, poor leadership can have devastating effects on a company's bottom line. When leaders lack the necessary skills, don’t communicate effectively, or make poor decisions, it can result in a variety of financial risks. From my work with many clients across different sectors, I’ve identified the sometimes-hidden costs of poor leadership and its impact on business, and outlined them in this post.
The financial implications of ineffective management
Ineffective management can pose significant financial risks for a company. Ultimately one of the primary financial consequences is a decrease in revenue. When leaders fail to identify and capitalise on market opportunities, make poor strategic decisions, or are unable to adapt to changing business environments, it can lead to a decline in sales and revenue. This is particularly seen with people new to leadership roles, who may have shown excellence in their earlier role, but not yet have the skills and experience in making strategic decisions. What often happens is the mistakes, or misjudgements made in a junior role come with significantly bigger impact and can no longer be overlooked. Without the development, skills and support to step up into these roles, new leaders can resort to ‘management by cliches’ rather than having the ability to really address issues and challenges with effective outcomes.
The result? Increased costs. Inefficient processes, lack of oversight, and poor decision-making can lead to wastage of resources and increased expenses. This can include anything from excessive inventory, unnecessary overtime, or even legal fees due to poor risk management practices.
The hidden costs of poor leadership in employee turnover and productivity
Employee turnover is one of the most significant hidden costs of poor leadership - we all know that people leave their managers, not their jobs. Not only does this result in recruitment and training expenses, but it also leads to decreased productivity. When employees leave, it takes time for their replacements to get up to speed, resulting in a temporary decrease in productivity. Additionally, the remaining employees often have to shoulder the additional workload which can lead to resentment, and if unresolved, burnout and more staff absences.
Overall, poor leadership is generally linked to a decrease in employee morale and job satisfaction. When leaders fail to provide guidance, recognition, or a positive work environment, it can result in employee disengagement and dissatisfaction. This often leads to decreased motivation, increased absenteeism, and a higher likelihood of employees seeking employment elsewhere. All factors sending productivity levels and financial profits into an ever-downward spiral.
The solution? Leading, not managing: Effective leadership can positively affect the bottom line
In contrast to poor leadership, we’ve all had jobs where our manager has made the days a breeze, regardless of the role or situation we found ourselves in. Really effective leadership can have a profound positive impact on a company's bottom line. Transparent leadership, open communication, and strategic decision-making are key to making a great manager, and part of how we would describe an effective leader:
“They’re easy to talk to, support me without taking over, don’t delay in making decisions, and always keep me and the team informed.”
When leaders are transparent, they build trust and confidence among employees, resulting in increased productivity and engagement. Open communication allows for effective collaboration, innovation, and problem-solving, leading to improved business outcomes.
And the other key difference - effective leaders prioritise leading rather than managing. They inspire and motivate their teams, encourage professional development, and foster a positive work culture, whilst practising what they preach. By empowering employees, effective leaders create a sense of ownership and accountability, resulting in increased employee satisfaction and retention. We know that when employees feel valued and supported, they are more likely to go above and beyond, leading to improved customer satisfaction, increased sales, and ultimately, a healthier financial result.
By investing in leadership development programs, promoting transparent and effective communication, and fostering a positive work culture, companies can mitigate the financial risks associated with poor leadership. Recognizing the importance of effective leadership and taking the necessary steps to cultivate it will not only lead to improved business outcomes but also contribute to the long-term success and sustainability of the organisation.
If you suspect that poor leadership may impacting your organisation’s productivity and resources, take a look at your leadership team, identify areas for improvement, and consider investing in some core skills to bring them up to speed.
Whether it’s coaching leaders 1-1, running a ‘difficult conversations’ session, or exploring self-awareness tools that help build empathy and support stronger teamwork, making steps to improve your leadership is a proactive and cost effective investment.