Do you feel like your company is in trouble? It is, if you notice any of the following four warning signs, says Philadelphia bankruptcy attorney David M. Offen, Esq.
The good news is that if you take action on one or more of the four suggestions below, your small business may be able to avoid filing for bankruptcy reorganization and protection and get back on track.
Warning Sign #1: Your Business Posts Consecutive Quarterly Losses.
Even if your small business has not gone public, you should monitor your finances quarterly to assess cash flow. If you are showing losses for three consecutive quarters in a row, you need to take a hard look at your business’ finances.
Warning Sign #2: Your Income Statement Shows Unaffordable Interest or Debt Payments.
Again, income statements are required of public companies, but even small privately-held companies should create and review their income statements for debt and interest paid on that debt. If you are experiencing losses three or more quarters in a row, you must find out why.
If your debt-to-income ratio is too high, your creditors will charge you more in interest, which ironically forces those least able to afford it to pay more interest on debt. Think about how you might reduce your company’s debt burden.
Warning Sign #3: Are You Arguing with your Auditor?
Whether your auditor is your in-house accountant or an independent firm, if you find yourself arguing with him or her about loss or profit allocation, it is time to determine whether you are merely being defensive about the stability of your company or your auditor is wrong. Consulting another professional will help you determine which.
Warning Sign #4: Have You Lost Members of Your Management Team?
Skilled managers are like rats leaving a sinking ship. They know when it is time to move on and find a position with a company that is more financially secure.
You may be tempted to chalk resignations up to a personality clash, a failure to fit in the company culture, or ambitions of promotions that aren’t available in your small business, but please be honest with yourself. If valued managers are leaving, it is more likely because they have seen one or more of the other three warning signs and are preserving their reputations and income streams.
How to Step Back from the Brink of Bankruptcy
The following suggestions on how to raise cash are listed in order of feasibility, with the last suggestion certainly having the most serious consequences for the quality of your product or service and the loyalty of your workforce.
Not every problem can be solved by cash alone. Before you take action, you must first determine exactly why you are showing a loss. For example, are customers paying late? Cash won’t solve that. Put a collection procedure in place and tighten up on due dates.
Whichever reason or reasons for showing a loss, you need to determine why and then take steps to solve that problem. Many problems can be solved with an influx of cash. Other problems are procedural or managerial and must be addressed internally by you, the owner of the business. Find out what is not working, and fix it.
If the availability of ready cash is the problem, here’s what to do:
First, Reduce or Eliminate Dividends
If your company is public, this is a common first step to take to get back on track. The company needs liquid assets to operate. If you cannot afford to pay shareholders as much as previously, reducing or eliminating dividend payments temporarily might allow you to pay down some debt and keep operating.
If your company is not public, you should look at the compensation of top management and owners. Reductions might be necessary. If you can find a way to restructure management’s compensation package to provide incentives to help solve your business’ problem with debt or liquidity, all the better. Owners should take a cut in their draw, as well. It’s only fair.
Second, Sell Business Assets to Raise Working Capital
Most businesses can find a product line or division that it can sell to raise money. While this is not ideal, it can serve not only to boost a business’ ready cash but refocus the business on what it does best – its core product or service.
Many companies, both large and small, have been caught out, overextending into additional products or services having been initially successful with their core product or service. If any of the above warning signs apply to your business, consider returning to a simpler business model, something similar to what you had when you were successful. Sometimes expansion simply does not work, and you have to put ego aside and cut back.
Third, Reduce Your Workforce
A reduction in workforce must happen if you sell a product line or division if those employees cannot be absorbed into the business’ core operations. It is a hard decision to make; however, part of the deal you might make with a purchaser would be to retain your former employees for a certain period of time following the sale of the product line or division. This is common.
Last, Reduce or Eliminate Employee Benefits or Perks
Reducing or eliminating employee benefits should be one of the last measures you take before you decide you must file bankruptcy. You want your employees to value their jobs and perform well for you, otherwise the quality of your products or services will suffer, as will employee loyalty.
This being said, you can save money by closing the company gym or cafeteria, or cutting back on your matching contribution to your employee’s 401(k) plans, or temporarily reducing the availability of paid conferences or training.
If you can avoid touching the core benefits your employees expect, such as good health insurance, accrued paid vacation, and a pension plan, you will be much better off in the long run. And that is what you are most concerned about, right?
The four warning signs are just that, warning signs. If you keep your fingers on the pulse of your company and take action sooner rather than later, you can avoid filing bankruptcy.
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David M. Offen, Esq., a busy Philadelphia bankruptcy lawyer.
