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Mar 7Andrew Tucker

Seven Principles for Avoiding Bankruptcy

Mar 7Andrew Tucker
Bankruptcy Written On Chalkboard

Today, companies continue to face difficult times and, sometimes, difficult decisions. According to the American Bankruptcy Institute, more than 208,000 companies filed for bankruptcy between 2006 and 2010. The annual rate of bankruptcies nearly tripled during this time.   This number does not include businesses that have closed/ceased to exist or continue in business with some form of financial discomfort.

An analysis of distressed middle-market companies would show that many of them could have avoided major issues by following some simple and elementary business principles. It is surprising how many experienced and qualified business owners, executives, and CFOs do not aggressively follow these seven principles. By ignoring them, management puts the survival of the business at risk.

According to an article written by Chuck Benjamin on CFO.com (full article), here are the Seven Principles:

1. Always maintain an updated business plan and be totally committed to its achievement. 
A business plan is critical to the success of a well-managed company and includes a sales and marketing plan, operating plan, capital-expense budget, and a cash-flow projection.

2. Always, at a minimum, achieve cash-flow equilibrium.
Planning and executing the balanced inflow and outflow of cash is critical to the success and protection of a well-run company.

3. Always be meticulously accurate, proactive, and timely in reporting and reviewing financial results. Financial results must be reviewed before presenting them to management,  bankers or other outside parties.  Always check for items such as missed journal entries, inaccurate accruals or incorrect footings.

4. Always ignore all “sacred cows,” aspects of your company you think can’t be changed, when matching revenues and expenses.
“We’ve always done it that way” is unacceptable when you must improve performance.  To quote the title of Robert Kriegel and Lewis Patler’s book, “If it Ain’t Broke…BREAK IT”!

5. Always be transparent, timely, and precise in reporting to secured and senior creditors.
Financial reporting is not an exact science and is often subject to interpretation. The presentation of reports to creditors and other outside parties should be treated with extreme care. Company management needs to emphasize timeliness and transparency.

6. Always be honest with others and above all, yourself — no exceptions!
The sooner company management faces the reality of a challenging situation, the quicker and better the solution.

7. Always be open to the counsel of independent professionals when facing difficult or challenging circumstances. 
During this period of economic change, executives at all levels are trying to understand the complex factors affecting corporate finances, markets, personnel and virtually every other aspect of management.  When in trouble, very often the natural reaction is to look for help. Seeking the advice and counsel of knowledgeable, experienced outside “specialists” sometimes can be crucial to a company’s survival.

These principles essentially form the foundation, the basis of sound business practice. They will help you maintain a state of preparedness, so you can adapt more quickly than the typical 6- or 12-month time horizon in which most companies operate. In a downturn, companies have to step up the speed of response. But whatever your company’s circumstances, in today’s uncertain climate you should act with a sense of urgency in all aspects of your business life. CFOs, senior executives, and business owners should view these fundamentals as a set of guidelines to follow — whether or not the company is in trouble.

I can help with this and many other aspects of your business.  Please contact me by e-mail at andrewtucker@b2bcfo.com or by phone at 704/651-2216.

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photo credit: Education Bankruptcy via photopin (license)

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