June 9, 2015

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Course Correction

Take these Steps to Veer off the Path to Bankruptcy

By Rachel Madison

June 9, 2015

A smart business owner is always in the process of reorganizing his or her company to adapt to the changing business environment—but when it comes to bankruptcy, restructuring and reorganization become even more paramount.

Learning how to avoid the severe financial distress that comes with the failure and liquidation of a business is one of the best things a new business owner can do. Here, experts weigh in on the steps companies can take to restructure effectively and avoid bankruptcy.

Understand cash flow. David Chase, managing partner of Advanced CFO Solutions, says the first thing any business ought to do is not be surprised by a shortfall in cash. “Business owners ought to be thinking well in advance, ‘How do we keep a good view on our cash?’” he says. “Utilize the 13-week cash flow model. Within three months, you can take care of most challenges as you see them coming.”

Chase adds that business owners should also put together a long-term cash flow view, which will help to define capital structure and give them a good view of how quickly they are spending their money and when they need to go to the bank.

Make due with as little capital investment as possible. Brian Rothschild, attorney at Parsons Behle & Latimer, says many young businesses invest in expensive offices, new equipment, flagship products and flashy marketing, but this strategy can burden a company with a heavy debt load. “[That] siphons off profits, restricts flexibility and makes the business’ product more expensive. … If you can get by without it, do so,” he says.

Adapt quickly to change. “Older businesses sometimes fall victim to upstarts because they fail to adapt to a changing business environment,” Rothschild says, adding that upstarts have an advantage because they are considering all of their business processes—customers, product offerings, employees—for the first time from the ground up. “To ensure that the old way is still the right way, successful businesses [should] regularly evaluate everything from the ground up,” Rothschild says. “Streamlining can change your business from surviving to thriving.”

Do the math. Businesses sometimes fail because they are providing services or selling products that are not profitable, Rothschild says. “A business should be realistic in its internal accounting for the costs of goods and services that it offers, and raise the price of anything that is not profitable at current volumes,” he says. “If the product is not attractive at the higher price point and customers balk, the business should not sell it.”

Liquidate inventory. There can be a lot of cash tied up in inventory, says Chase. “If you’ve got $1 million sitting in your warehouse, find a way to get it down to $500,000,” he says. The concern many business owners have is that customer service and inventory work hand in hand—meaning if a company doesn’t have much inventory and someone calls wanting to order 1,000 of a certain product and the company doesn’t have it available, it’s viewed as poor customer service.

However, as a company approaches bankruptcy, Chase says it might be better to lose a sale if it means the company can still make payroll. “Entrepreneurs need to think about the relationship between high and low inventory and high and low customer service and adjust that mix as cash gets tight,” he says.

Pay out profits last. Rothschild admits it can be tempting to pay out profits to owners and shareholders after a good month, but doing so without reserving for lean times and upcoming capital investments, such as equipment that needs to be replaced, can be dangerous. “Reserve properly and pay out profits cautiously,” he says.

Fail quickly. It’s important to recognize when a business is unsalvageable, Rothschild says. “Often business owners in this situation will invest more, take out additional loans, personally guarantee lines of credit, and sell profitable lines of business to keep unprofitable lines afloat,” he says. “Rather than go down with a sinking ship, learn to recognize the end of a business early so that you still have means to invest in something new and potentially profitable.”

Hire outside help. As a last resort, a company can hire an outside consultant to review its financials. “Circumstances can be pretty overwhelming, and the stress of dealing with this alone makes people crazy,” Chase says. “If you find yourself feeling this way, hire professionals to get you through the process. They can range from a CPA to people who do CFO accounting work to professionals who focus on restructuring.”

“Business owners are good at making the product they make, but they’re not so good at stepping back and saying, ‘Why are we doing the process we’re doing?’” Rothschild adds. “Hiring an outside person to do an evaluation as to whether what you’re doing still makes sense is totally worth it.”   

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