Businesses in financial crisis are often swirling in chaos. Managers get consumed with putting out fires. But when you're moving from one emergency to another, it's easy to lose track of the road ahead.
Many managers make common mistakes, from letting go of the wrong people to misleading employees and creditors to not carefully watching their money.
Managers frequently focus on cutting costs, but deciding that the accounting folks are expendable is a frequent error. Tracking financial data is crucial when you're trying to save a business. If the accounting personnel contributed to the financial crisis, it's better to hire replacements instead of sweeping out all the financial folks. Of course, where there's employee fraud, complete incompetence, intentional misreporting or other grievous woes, they've got to go.
New accounting personnel, no matter how competent, need current employees to explain the existing systems, location of records, types of reports and any idiosyncrasies of the bookkeeping system. Without time to transition from old to new, the new number crunchers may have to do more forensic accounting - trying to reconstruct what has happened in the past - than regular financial reporting. Without good accounting folks, a business can easily lose the ability to get timely, accurate financial information.
Whether a restructuring takes place out of court or through a reorganization plan in bankruptcy, keeping on good terms with company creditors is not only wise but could be the glue that makes a bad financial situation better. Even unfavorable news is better than no news at all: if no one's returning your creditors' calls, they will likely assume there's something more dastardly going on than them simply not getting paid.
Don't Lie
What's worse than not returning calls, however, is giving misleading information. The person who wants to stay in business usually thinks that any admission of financial distress is a bad idea, and that it's better to either say nothing or pass along inaccurate information in the hope that credit won't dry up. The theory seems to be that lack of information merely leads to nothing worse than speculation. But misleading information can be infinitely damaging, leading to distrust when the truth is eventually discovered.
Giving accurate financial information is crucial to keeping a good relationship with creditors, and increases the odds of a successful reorganization.
Employees should be treated with no less respect than creditors. Rumors of financial distress within an organization are sure to trigger a mass mailing of resumes.
Management in a financially challenged business should examine each segment of the company to see what can be changed or eliminated in order to better the odds of surviving.
Those parts of the business that drain more from the bottom line than they contribute can be labeled "bleeders." Not staunching that negative cash flow - cutting costs and positions - could lead to the company's demise.
Spend Wisely
Managers should also turn a careful eye to overhead, which includes things like travel, insurance, rent and utilities. Are there any sacred cow expenditures that could be sacrificed? For example, prestige alone may not be a good enough reason to remain in a high-rent district.
With financial woes, expect creditors to want cash for any deliveries.
A struggling business also needs to stash some cash to cover potential bankruptcy costs, such as trustee and appraiser fees and deposits to keep utilities going.
There are a few ways to come up with the cash - borrowing, selling securities, liquidating property that isn't essential, keeping proceeds of accounts that would otherwise be turned over to a secured lender, and so on. But beware that some of these cash-producing methods are subject to the claims of third parties, and others may involve fraud or securities violations.
Don't Be Dumb
While raising cash is crucial, avoid doing anything that gives rise to graver problems than just being broke.
Since companies pay government agencies from payroll withholdings, the temptation in financially troubled times is to treat such agencies as involuntary lenders. But those responsible face liability, and the unpaid taxes can later trip up a Chapter 11 bankruptcy reorganization plan.
The pressures of debt can cause you to make decisions that may appear smart in the short term, but later turn out to be unwise. Think ahead.
By avoiding common mistakes, debtors have a fighting chance of avoiding bankruptcy. But even if you do end up in a Chapter 11 bankruptcy, your odds of recovery are better.
http://bankruptcy.lawyers.com/Salvaging-a-Troubled-Business.html
