What to do when you are caught in a cash crunch

By Morris Bocian

Today, many business owners are caught in a cash crunch. Although many entrepreneurs are in denial as to their situation, many other entrepreneurs do not understand the process necessary to identify and address the difficult issues needed to survive the crunch. If you are facing a cash crunch, being passive and hoping the business will correct itself with either an economic upturn, new clients or a large order more often than not turns out to be wishful thinking.

Operating your business as usual and failing to make a concerted effort to revamp your company’s cost/operating restructure, could put you out of business. The best time to restructure is not when your company is on “life support.” The best time to effectuate change is when you have the cash, available credit and ability to implement change. If you foresee material adverse market conditions or a structural change in your industry/business, it is your responsibility, as the business owner, to develop and implement an action plan that, at a minimum, will enable your company to survive.

Many entrepreneurs think they can grow their company out of trouble. In other words, if my overhead is too high for my existing capacity, if I grow my business I will spread my overhead over a larger operation, thereby solving my financial problem. Although this philosophy may hold true during certain phases of a company’s life cycle, it does not hold true during a cash crunch attributable to changing economy, loss of a major customer or bad business decisions.

Stabilize Your Company

When cash flow problems arise, either from a loss of a major customer, an industry-wide problem, or a bad business decision, reviewing and revamping your company’s cost/operating restructure is a necessary first step. If the savings from revamping operations are insufficient then debt mediation becomes the option of choice.

Restructuring should not be undertaken lightly. It is a serious step that can shake a lender’s confidence and lead to even more financial problems down the road. It may be hard to imagine, especially when you go through the process, a debt restructure can prove to be a godsend. It forces the business owner to ask certain key questions:

Why isn’t the business working the way it was expected to?

Why are my customers paying slowly – or not paying?

Why are sales below expectations?

Why aren’t product lines selling or profitable?

Why are vendors missing shipments dates? Should we find a replacement for that supplier?

Few lenders are willing to restructure their debt if you cannot show them that you are on the path of correcting your problems. Restructuring debt, or a “workout,” involves an action plan beginning with “stopping the bleeding” through aggressive cost cutting. The primary goal is to ease the company’s cash crunch, while putting the company back on track, without costly litigation. Once you can demonstrate that you have a complete understanding and commitment to making your business work, then the entrepreneur can begin negotiating with creditors. In many cases, the troubled company can still maintain a working relationship with its existing suppliers and financial institutions.

Engage Outside Professionals

Probably the most important thing a business owner can do is to engage an outside professional to assist with the workout. The professional provides the following:

I. The professional adds credibility to the negotiation process by showing the suppliers/creditors/banks that management is serious about rectifying the company’s problems.

II. The professional does not have the emotional involvement to your business or your personnel as you might. It can be excruciatingly difficult for an entrepreneur to:

Eliminate nonessential employees

Defer any plans to expand the business

Eliminate certain product lines

The entrepreneur’s personality and emotions often get in the way. The turnaround professional looks at a company objectively, and does not have the emotional commitments to the way the business is currently being operated.

III. Once the turnaround professional recommends certain steps, and the entrepreneur agrees to it, the entrepreneur becomes accountable to the professional, the board and others to implement the changes within an agreed upon timeline.

IV. The outside professional provides a buffer between the troubled company and its employees and creditors. The entrepreneur and outside professionals can focus on stabilizing the company, evaluating alternate business strategies and managing the business. This will allow the entrepreneur to focus and lead the business utilizing a new action plan.

Risks of Initiating a Workout

Initiating a workout can have an extremely serious impact on your business. Workouts are appropriate provided the entrepreneur has been acting with integrity with its suppliers/creditors. If you maintained your credibility with your creditors and your professionals can show your creditors a viable exit strategy (a way that their loans can be repaid), your prospects for a debt restructure improve significantly. If there are issues that plague your industry, make sure your creditors are aware of them. Lenders are more apt to work with you if they realize the problem is global and not limited to your operations.

If creditors feel that you are being disingenuous and are using the workout process as a ploy to circumvent payment, obviously, this approach will not work. They can restrict your ability to utilize your existing credit facilities and often accelerate collection efforts, thereby pushing companies into bankruptcy. Accordingly, your relationships with your creditors become extremely important.

Creditors will be seeking certain “sensitive” information about your financial situation and your company’s financial condition. Certain business owners view the information requests as a “roadmap to future litigation” if the workout is unsuccessful. If your relationships with certain creditors are shaky, due to surprising your creditors with bad news, credibility issues or mistrust, it will make the workout much more difficult.

A workout is not a matter of public record. In a workout, there are no major events or disclosures that trigger action that could negatively impact a business by its customers, creditors or employees. Since customers, suppliers, and lenders are not informed of a workout, customers are less likely to look for other suppliers, assuming the customers are being serviced appropriately. Further, workouts do not require financial and other disclosures that may be available to potential customers, existing customers and creditors. Workouts do not require a plan of reorganization be filed and approved by creditors or through the court.

Chapter 11 Bankruptcy

Unfortunately, many owners of troubled companies view bankruptcy as a way to reorganize debt and operate as a more efficient company post bankruptcy. While larger companies with professionals at the helm take full advantage of the bankruptcy laws, the realities are that in calendar year 2000, less than 10% of the companies that filed for Chapter 11 protection (bankruptcy reorganization) emerged from bankruptcy as an operating company. The likelihood of a small business filing for Chapter 11 protection emerging as an operating company is significantly smaller than 10%. Generally the small business will be liquidated.

When cash is tight, the added legal expense and distraction of a bankruptcy can damage a company’s probability of survival. It is common that customers of the bankrupt company start to look for other suppliers in anticipation of liquidation, further reducing the company’s viability.

As the entrepreneur is forced to focus on a host of legal issues, the development of a plan of reorganization, and deal with issues such as low morale, turnover of key personnel, inevitably other problems develop. It is not unusual to see a combination of deteriorating sales, collections and productivity, as an indirect result of the bankruptcy filing, further jeopardizing the company’s viability. When this chain of events occurs, the bankrupt company is, generally, required to liquidate.

Morris Bocian is CEO of Creative Business Planning Inc., an established business and strategic consulting company. His email is mb@creativebusinessplanning.com