Bankruptcy

How to Survive the Downturn

By J. Michael McBride

Although the economy remains relatively strong in Texas, businesses that rely on the national economy need to be paying close attention to the national scene.
In fact, it’s a good time for businesses of all types to review their contractual agreements and tighten up their internal controls to help ensure their business remains healthy.

1. Keep up with your customers. Even long time customers who have always paid their bills on time may start to slow their payments in the coming months due to trickle-downs or problems they may be experiencing based on their own difficulties with collections.

2. Re-evaluate your credit policies and contracts. If you are selling products on credit, you are lending money. When a customer files bankruptcy, it’s too late to test the strength of your contracts. Many credit agreements do not spell out your legal rights in the event of a bankruptcy. Since the line of creditors can be long when trouble strikes, have your attorney review the credit contracts you use with customers to make sure you will be first in the line. Recent cases suggest that bankruptcy courts may be more amenable to creditor friendly language in customer contracts.

3. Visit your largest customers. Even if it’s not part of your normal business operation, now is a good time to jump in the car or on a plane and pay a personal visit to your most important customers. Seeing a customer’s facility in person is the best way to evaluate whether or not things are really going well. A lot can be hidden over the phone.

4. Obtain and review current financial information your largest customers. This includes balance sheets, profit and loss statements, cash flow analyses as well as the aged accounts receivable. Make sure you know what’s going on with the people who help keep your doors open. You should consider taking this process one step further by meeting with the accounts receivable clerk (to check on write off frequency – has it increased or decreased?) or the customer’s auditor. If the account is large enough or important enough to your business, perhaps you should send in your own auditor to check on the company’s status, assuming your contracts allow this.

5. Act fast. At the first sign of slow-downs or changes in your business, it’s time to adjust your business practices and become more cautious. Don’t wait for things to get worse. This may mean slowing down production, looking for ways to reduce overhead, or tightening up your credit policies. It’s best to err on the side of caution.

6. Know your own marketplace. Pay attention to what your competition is doing and don’t be blinded by your successful years of experience and the way things have always been. Your market may well be in a decline. Be objective and pay attention to what’s happening around you. Listen to what outside experts say about your industry and do no simply rely on your past (good) expertise.

Today’s market situation is different than anything we’ve experienced in a while, and this particular recession looks like it could be particularly challenging.

Michael

Full post as published by Texas Lawyer Blog on April 16, 2008 (boomark / email).