How can I save a company that is on the verge of going bankrupt?
Maybe this is one the situations that causes headaches to both general managers and CEOs: financial crisis. There is a company in which I'm involved in, and we succeeded to make the first step in building a corporate identity but we needed the last financial support to keep us up. Unfortunately, we couldn't afford to get that financial support and we are still trying. What would be the most rational and cost-effective to avoid the possible fall of the company?
Expert Answers
Sort by Date
Sort by Votes
Oct 30, 2014
This tough...Ask yourself how committed you are to whole project and if the commitment is not there walk away unless you signed personally for the company..
You might look for a partner, then again you must determine how much capital you really need using a bear bones budget. and really thinking about your real revenues and their strength
Oct 30, 2014
Unfortunately there are no clear or simple answers to this question. It is however your choice to hold or get radical. First do a new current financial statement, see where you exactly stand. then do a complete financial analysis of your payroll structure. How long can you actually last? You will most likely have to cut seriously on expenditures, all Executives will need to agree to payroll cuts, of at least 30%, any non-essential employees will have to take time off, and mid-management will need to take on the major functioning roles. Hourly may have to cut 20% as well.This will normally give you anywhere from one to three months income padding. Your safety net! If your customer base is solid and your product out put does not suffer, you should be back in six to eight months. You may loose several disgruntled employees, but this could be a good thing in the long run. No one likes to say that this was inevitable, but then these are the most usual reasons of why your in this situation. Unless your company was hit by a major shift in economics or your industry just plummeted. There are Angel foundations out there that may be able to help. You can also call on SBA, officials to help you get back on track. Remember the old adage CASH IS KING, cut as much credit purchasing as possible immediately.
Good luck, I'll hope for the best.
Oct 30, 2014
This is a little hard to answer since we don't know what your business is. Think about this though...It wasn't long ago that Apple was on the brink of extinction. Why? A few bad decisions, spending too much, and not creating anything worth a sh!t. Look at them today - the most valuable company in the world (unless Alibaba took this by now).
As many others mentioned in here, start by looking at a few key components:
Cash Out
Cash In
Revenue Streams you can still create on the cheap
With cash out - there are more than likely quite a few things you can do things differently. As a matter of fact - the first 3 years of my first company - ZeroZen Design, we didn't have an office. We met clients in hotel lobbies, bars, coffee shops, parks, etc. No rent, no power bill, free internet! We also made sure we didn't just follow the pack when it came to tools needed to run our business. Things like Microsoft 365, Basecamp, etc. All expensive wastes. We use Zoho for just about everything and they are SUPER affordable!
Cash in - Are you charging enough? Too much? Just right? We have increased prices at ZeroZen over the years, but always added value as well to offset the increase and make use more attractive than competitors.
The missing revenue stream - I just had a consulting meeting with a client this morning and they want to revamp their entire lead nurturing system. Mixed in with this system, they talk about things leads can use to improve their businesses, lives, etc. They actually have links to different places where leads can find it easily. Most of these leads straight to Amazon. The problem - NO AMAZON AFFILIATE ACCOUNT SET UP!
They have around 20,000 leads at any given time. Of course the email drips are automated and relatively free, why not get 2 or 3 bucks from each of those 20,000?
I would gladly set up an affiliate account to passively add $40,000 - $60,000 to my revenue each year!
Hope all this helps! Good luck with pulling the stick back and working the business into a climb.
If you have questions - message me!
Oct 29, 2014
I think more information is required to help on this one. What is the nature of the business? Is there opportunity to lower overheads, or re allocate resource to money making ventures such as sales?
Oct 29, 2014
Managing under fire is a tough task. There are some great ideas given to you. Look at your entire operation to see if the validity of you pulling ahead is worth it and truthful. Be cautious of cuts. Don't cut quality, mess with your integrity or anything that will eventually make things worse.
Get your team to have a round table or brainstorm to get ideas to make it happen. They work with you, they should know.
I have to say I held on to a company in the same situation once which ended up cost me a lot of money and was an expensive however valuable lesson. I am not saying this is you, I dont know your situation or what type of business you are talking about. Be cautious to growing more debt than you have to.
Dreams seem to be crushed because of these circumstances however, life goes on, you pick up the pieces and move on. Never ever give up because one thing didn't happen. I wish you the best of success. Gil
Oct 29, 2014
Thank you Gil for your nice words. I agree with you and it relieves me knowing that I have to fail better :)
Oct 29, 2014
You need to move quickly on this as (if you are in England and Wales; and Scotland) under the Insolvency Legislation if you continue to trade whilst knowingly insolvent ( known as over trading), then you can lose the protection of the Limited Company, and become liable for the debts yourself along with the other Directors.
Firstly, what sort of turnover do you have, and what is the efficiency in recovering trade Credit?
That is to say how strong is your collections team in the Credit Control section of your accounts department?
To use a technical term, what is your DSO and age profile look like.
DSO is a general average which indicates the speed which you recover your debt against your terms. It is calculated on the total of the value of the Sales Ledger, less the months trading in terms of invoice value. That will leave you with a balance.
Subtract the previous months total sales value, and that will leave you with another balance; subtract the previous months trading to that which hopefully will leave a residual not equal, but less than the months trading prior to that.
This is know as the Working back method.
e.g Sales Ledger value £1 000 000 (cob 31/5/14
Last months t/o £ 450 000 (Say May)
Balance carried down £ 550 000
Previous months trading £ 320 000 (April)
Balance Carried down £ 230 000
Previous month trading £ 460 000 (March)
difference = 230,00 short of the March trading therefore 50% pro rata of that months
biling.
So you have 31 days for May which remains outstanding (but withing terms)
30 days for April which remains outstand (but outside terms)
15 days out the March trading ; i.e. 50% of that months turnover,over terms.
add the three up, and that gives you a DSO of 76 days. Subtact the las months trading (31 days) and that means that your clients are trading (on average) at 45 days over terms. In to-days market, not bad.
This can be qualified by the age profile of the debt, which almost all account software will do for you. The April amount fully absorbed in the remaining ledger so whole months turnover not paid (technically) so that would fall in to your 31-60 due period; 61-90 and so on.
Usually the profile is a U shape, with a (hopefully) only a small percentage in the 90+ coloum. Most of that will be a combination of disputed debt, matters in litigation or straigt write off.
With the profile of the ledger sorted that means that you can qualify the DSO figure on the same percentage basis of each months value actually outstanding against the same months turnover.
There are other ways of calculation but the above (known as the working back method) is the most frequently used and recognised.
Once you have assessed the weak area; you need to analyse why the debts are there.
It may be that there is a large, ongoing dispute, which could easily be resolved by a simple Credit Note, and the client make payment.
If you have real cash-flow problems, have a telephone calling regime that concentrates on the high value and immediately due items; i,e, large values 2 days over terms. This gives you the oppourtunity to find a dispute early. Also you know the date to expect the money, diarise it and follow it up with another phone call if not received: "Where is it?".
Sending out Statements on a monthly basis is still a good trigger for payments, particularly if you are able to narrate the statement with questions why certain items have not been paid. Sometimes that saves phone calls. With E-mail remitting statements can be far cheaper than the days when everything had to go "snail mail". However, if you are going to use e-mail, make sure that it goes to either a generic address or to someone like the Financial Controller, making sure that any changes of e-mail address are quickly ammended on the system; the same goes for postal addresses as well.
Always diarise a promise of payment, and follow up the day after the agreed date of payment. A little prod is sometimes all that is needed to remind them that when they make a promise you expect it to be complied with !
Be wary of the client who refuses to pay any invoices on their account just because one invoice is in dispute. Each invoice is a contract in its own right and therefore if there are no issues with the others, they must be paid to terms. You must remember that the terms of trade are YOURS, not theris. If they claim there are many disputes, take a copy of their account and invoices outstanding and make an appointment to meet with either their Financial Controller /Director.
Get the issues raised, dealt with face to face and you can either phone your office for Credit Notes agreed to be generated immediately, sent by FAX or e-mail, downloaded and presented to the debtor. Oh, don't be swayed by the argument that it takes them 30 days to process the Credit Note or they are entitled to 30 days "Credit" on the Credit Note.
Since you are sitting in front of the decision maker and authority, there is no reason why you should not be able to walk off site with a cheque in your hand.
Do not be frightened of going to litigation. If a debtor is causing problems, you only need to issues a "Notice of intent to commence legal procedings" with the value you are proposing to issue for, making it clear that you will not be pursuing invoices which are know to be in dispute. Again, each invoice is a contract in its own right.
The Small Claims Court is £5000 and can be made on line these days, and the drafting of a Summons and Particulars of Claim far simpler than pre 1999 and the Woolfe Reforms were put in to place. These reforms stripped out the Latin terms which used to be required in drafting Particulars of Claim, and the forms as a whole far clearer to understand. You can still issue up to £50 000 in the County Court without the need for a Solicitor, but your Particuars of Claim does need to be a little more formal, more to the point accurate.
Many large companies try to bully smaller ones in delaying payment because the claim that they are so large, that they cannot turn around an invoice in the 30 days. Alternatively say that it is their "policy" not to pay within 60 days. (They would not say that to Inland Revenue or HM Customs VAT ! )
In the latter case, you have to ask yourself: "is it worth trading with them if you are having to service their debt to you on YOUR overdraft?". With interest rates on overdrafts not falling in line with Base Rate, and costs of production rising, you can soon see your profits being destroyed. Again, have no hestation in ceasing to trade with them and go to Court. Often you will find that they will pay as soon as a County Court Summons hits their desk !
As we have seen in this last recession (which I do not believe is over by a long chalk, despite the propaganda), just because the trading party has a big name, and looks impressive with their name in lights, does not mean that they are infallable.
With new busines, always ensure that you check the credit worthiness of businesses counter-parties. Check their accounts at Companies House or use one of the Credit Reference Agencies such as Experian or Graydon. Are they a viable company to give Credit to?
That does not mean that you do not trade with that counter party; it is just they pay cash with order. Once a trust is built up then you can consider a line of Credit, taking in to account the state of the company as the accounts are filed at Companies House.
Cashflow is king, particularly in the current market. Disputes are the biggest disruption to that; deal with them quickly and that can make a huge difference.
Oct 29, 2014
Be cautious with Inovice Factoring. It can be expensive, paricularly when you are dealing with "recourse factoring" where the Factor can debit back the invoice paid out on, if a dispute is not resolved or goes over the agreed time frame of factoring.
It works well the small value, high voloume, small business who cannot afford to engage a Credit Controller, and you have a low number of disputes.
Also with non-recourse factoring where (in effect) the Factor buys the invoice from you, they will absorb bad debt, providing that you have complied with their trading terms and kept disputes under control.
Oct 29, 2014
I am not going to anwer what to do, others have given good ideas. I will caution you though about your need to be realistic. Also make sure you are protected, do not make the mission of saving the company something that causes you to lose your home or put your family at risk.
Oct 29, 2014
There are 3 courses of action to consider:
1. An orderly shutdown without a bankruptcy filing. In the U.S. you can be forced into bankruptcy by 3 creditors but this does not normally happen without a lot of money owed. It is n expensive process and the creditors have to hire lawyer who could charge them $10K to $20K for handling it. Generally a waste of money and time for all involved unless there are large assets to divide. You simply shut down and walk away. Some creditors will not get paid. That is the cost of doing business - there is always risk extending credit. This is NOT a bankruptcy. It is a shut down.
2. Do a "Pivot" - This means changing the focus, story and market entry strategy significantly from what you have been trying that has not attracted the customers and/or capital you have been seeking. This new story may attract capital and more customers.
3. File bankruptcy (Chapter-7) which will dissolve the corporation and divide the assets between creditors in proportion to the debt to them. Equity holders will generally get wiped out and receive nothing.
If you do a pivot you can also ask creditor to discount the debt owed. They may understand they have a chance of something or nothing. It is no uncommon for them to give 50% to 85% discounts to get something later. If there are many some will cooperate and other may not but it is designed to take the pressure off for a time period so you can do the pivot.
It is not an easy time for anyone but it is business in the Darwinian world of capitalism. Over 60% of businesses will fail in the first 5 years. The root cause is they lack the mentorship and experience to be successful. Lack of capital and sales is always the excuse in the mind of the entrepreneur but usually this is a rationalization and they had a poor strategy or execution or both. It takes decades to be able to model a business in your head and make adjustments without month, even years, of trial and error.
Oct 29, 2014
Reboot. Determine competitive position, cost of customer acquisition, and lifetime value of customer. Two large reasons why new companies fail is lack of or bad strategy, lack of proper funding. As stated previously, unless you have a clear path/work plan to reach profitability, you're not going to get funded.
Oct 25, 2014
Hi,
You have been provided with some general guidance of what you need to do from the fellows.
In order to obtain the right answer some minimal context needs to be provided.
Kind regards,
It's a new start-up that was recently launched with trade, tourism, export/import as main scope. There were some initiatives that were taken individually to gear the company up. However, it takes time for a company to stand up,and unfortunately, the company owner was frequently influenced by external actors and factors. The question is how to get out of the bottleneck for good: carrying on and braving all the dangers? or simply one has to gather her pieces and foresee other doors that we may already have the key for that.