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Seven Principles for Avoiding Bankruptcy

A turnaround expert lays out the basics necessary for a CFO to keep a company afloat.

CFO MAGAZINE

By Chuck Benjamin – October 27, 2011

Companies today are trying to navigate in turbulent, troubled times – and many can’t stay on course.  Between 2006 and 2010, more than 208,000 companies filed for bankruptcy, according to the American Bankruptcy Institute.  The annual rate of bankruptcies has nearly tripled during this period, with no end in sight.  And the total number, staggering in itself, doesn’t include enterprises that have ceased to exist through non-bankruptcy proceedings or continue to limp along in some degree of financial crisis.  

A detailed analysis of distressed middle-market companies would demonstrate that many could have avoided severe losses and often the loss of the business itself by following some seemingly 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 at risk the very survival of the business.

1. Always maintain an updated business plan and be totally committed to its achievement.

A business plan is critical to the governance and success of a well-managed company. A proper plan includes a sales and marketing plan, operating plan, capital-expense budget and a cash-flow projection. This is the roadmap that should guide every aspect of budgeting, sales, operations and finance. It is the primary tool that aids in executive decisions to keep revenues and expenses in equilibrium. As markets change for better or worse, of course, it is critical to adjust the business plan accordingly.

2. Always, at a minimum, achieve cash-flow equilibrium.

Planning and executing the balanced in-flow and out-flow of cash is critical to the success and protection of a well-run company.  When financial conditions deteriorate, as they are so prone to do in these very poor and unpredictable economic times, CFOs must manage and adjust cash attributes constantly.  In this very challenging climate, it is not unusual to have significant monthly sales swings that stretch cash flow severely.

3. Always be meticulously accurate, proactive and timely in reporting and reviewing financial results.

There are few CFOs who haven’t experienced that sinking feeling when presenting the company’s financials, only to have the CEO, a board member, or an important investor discover major or even minor errors in financial reports. Missed journal entries, inaccurate accruals and even incorrect footings must be reviewed diligently before a presentation.

4.  Always ignore all “sacred cows,” aspects of your company which 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. Maximizing corporate efficiencies, managing expenses, inventory levels and capital expenditures, and making the hard day to day decisions often determine the difference between success and failure.  You should resolve to avoid judgments that follow historical, business as usual allegiances to people, processes, products and methods.

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, particularly to those with senior positions, should be treated with extreme care. CFOs and senior management need to emphasize timeliness and transparency.  All too often, reports are delayed or purged of negatives to avoid disseminating “bad news.”  This approach is counterproductive.  Once the actual results become known, the trust of the creditor may be permanently impaired and the debtor company irreparably harmed.

6. Always be honest with others and above all, yourself -- no exceptions!

The sooner you – and senior management -- face the reality of a challenging situation, the quicker and better the solution.  If you fool yourself and those around you, the odds of failure are dramatically higher.  While painful, recognizing and dealing head-on with the issues at hand invariably lead to a better result.

7. Always be open to the counsel of independent professionals when facing difficult or challenging circumstances.

During this rapidly-moving era of economic change, executives at all levels are attempting to track and understand the increasingly complex factors affecting corporate finances, markets, personnel and virtually every other aspect of management.  It is difficult if not impossible to keep up with it all. Merely focusing on the myriad aspects of your own business is often more than an adequate task.  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 six- 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.

Chuck Benjamin, president of Benjamin Capital Advisors, has advised companies in distress and those facing operational difficulties for the past 23 years.