Many companies are facing weak cash flow in the current economy and are failing to take the right corrective action steps. This will eventually lead to some hard decisions if the current management can not turn the company toward profitability. When things go badly for an extended period, there are generally four options that management can choose from: sale or merger, file for Chapter 11 of the Bankruptcy Act, file for liquidation under Chapter 7 of the Bankruptcy Act, or seek an informal reorganization – or "workout."
Informal reorganization, or "workout," is often seen by management, stockholders, and creditors as the best solution. This type of reorganization is seen by creditors and stockholders as a less drastic measure and, therefore, is often seen as an option that has the least to lose and the most to gain. This option also has the added benefit of usually being less expensive.
In a workout, management will usually hire an outsider to develop the informal reorganization plan. The initial goal of the workout is to turn the business around. The largest cause of failure for a workout is the lack of willingness to change by stockholders or by management. If the company's informal reorganization fails, the company usually only has two other options - Chapter 11 or Chapter 7.
Success is often achieved if management is willing to change and the company's creditors are willing to cooperate. Oftentimes, the creditors will be happy to see a workout consultant and participate knowing they will make out better then they would in Chapter 11 or Chapter 7. The goal in working with the creditors is to buy time to get a plan in place to make the company profitable.
There are certain actions that need to be taken by a struggling company. These include reviewing financial statements, tax returns, tax notices, policies, and communications with attorneys and major creditors. Reviewing major creditors' businesses to ascertain if they are stable and profitable (this will help in remediation proposals specifically for that creditor). Through this quick study, an assessment is made to determine if the business is a viable going concern. Can it be turned around with an informal reorganization plan?
If the business is viable, the next step is to negotiate with lenders and vendors. The goal is to provide breathing room for the company to get back on their feet financially. Keeping lenders and vendors knowledgeable about the process will help you heal any hard feelings that may be there from past transaction difficulties, and you will start to develop a trust relationship again. The company needs these relationships to continue to provide a service or product to their client or customers. If these relationships cannot be established, the business may not survive.
Next, is a review of cash flow to determine ways to increase. This can be done by reducing payroll, cutting expenses, selling fixed assets not critical to the company's operations, changing hours of operation, and working with lending institutions on current interest rates and new financing. Without cash flow, the company will not survive.
With agreements complete with lenders and vendors and a temporary cash flow fix, the next step is to focus on a rehabilitation plan. This is a plan that can change on a regular basis due to vendor or lending institution demands. The plan is designed to bring the company back to normal operations or to make it attractive for acquisition.
Once the rehabilitation plan is complete, parts of it are shared with vendors and lenders hoping they will agree with the terms and keep working with the business. Oftentimes, bringing up the other bankruptcy options are enough to stimulate the vendor into going along with the plan.
Once the plan is accepted by everyone involved, it is monitored on a daily basis. This is a critical period and generally the company's last chance to come through on their promises. The key to avoiding bankruptcy is starting a workout plan early. Too often we see workouts started too late when the damage is too great.
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