Avoiding Bankruptcy
"9-Keys" is an insightful series of "How To's" that addresses vital issues that any business owner can benefit from. They are:
8) AVOIDING
BANKRUPTCY
Seated across the desk from a
new client, I asked him why he had retained me - a typical inquiry for any
consultant meeting a client for the first time. He calmly informed me that he
was scheduled for a hearing at the bankruptcy court and he thought that I might
be able to help. I asked him why he did not do something about the situation
before.
Almost angrily, he said that he
did not know about me before, stating it as if it were my fault for not getting
in touch with him sooner. During the next few days, I did work up a plan that
convinced the creditors to give this firm a little more time. A few of the
larger creditors even put up 10 percent of what was owed to them, for immediate
operating cash.
Most bankrupts never develop enough awareness to learn that they are the
problem. It is much easier to blame others for our own failings or
mismanagement. I asked some business owners who were in the middle of bankruptcy
proceedings, what caused their financial downfall.
They answered, "the government,
the unions, crooked vendors and lazy workers." Not one even remotely hinted that
it might be at least partially due to some failing in their own management
methods. It is very rare that I am called in by business owners who are close to
bankruptcy, for they are usually convinced of the righteousness of their
views.
Most of the time, those who find
themselves in serious financial difficulty, think that if they could just borrow
a little more money, everything would work out. The reality is, however, that if
a business is not operating profitably, and the management does not learn how to
control money, any additional funds will eventually slip through the till like
water through a leaky bucket, resulting in greater debt. The questions that
should be asked are how to get more out of the money you already have, and how
to pay back the money you would still need to borrow and to project the payback
before you borrow.
Money scheduling is important
regardless of which direction interest rates are moving. Business owners should
avoid borrowing money to pay bills if the interest rate is greater than their
gross profits.
Bankruptcies do not happen
overnight. Unfortunately, too many business people lark the financial discipline
to know their condition until its too late. The time to avoid being trapped by
high interest rates is before the problems responsible for the cash drain, get
out of control.
Successful business people must
learn how to use money, just as they learn to use their equipment, goods and
services, and people. If they poorly schedule any of these elements, they are
going to fail. They must guide and motivate their personnel so that they perform
at the highest possible level. They must control their purchases and inventories
so that material is used best. They must see that their equipment is fully
utilized. They must use money as the oil that lubricates these elements. If you
run out of oil, the machine grinds to a halt.
Unfortunately, too few small
business owners think about the scheduling of money.
Rarely do I see a small company
that pre-plans its cash flow requirements. They first seriously consider their
cash flow requirements at the moment they discover that there isn't enough money
to pay current bills. Even profitable business people can get into fiscal
trouble if money isn't tightly controlled.
A business might show a profit
on the books, but have too much money tied up in slow-paying or even
questionable receivables. It may show a profit with excess money tied up in
sluggishly turning inventories. A potentially profitable business could fail
from expanding faster than its own capital base. It does not require a special
skill to make a reasonably accurate cash flow projection. With an analysis of
their own histories, business owners can determine what their expenses will be
in the weeks and months ahead and then project what is reasonable to expect in
receivables
in that period. Wise fiscal
managers know their money needs, establish credit lines in advance of need, and
project the payback before they borrow.
By Gerard
Major
Mr. Major's firm Confidential Practices, Inc. offers free consultations. Their Web site can be reached by clicking here.
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