Watch for warning signs Featured

10:39am EDT April 26, 2006

If a person who is not feeling well visits the doctor soon enough, most diseases are treatable. Michael O’Neil, director for Sommer Barnard PC, compares financial problems for a business the same way, stating that most financial troubles can be dealt with successfully if you recognize the symptoms early and visit a financial specialist.

O’Neil says early acknowledgement and a candid assessment of what needs to happen is the best prescription for the problem. Smart Business spoke with O’Neil about symptoms that may signal financial problems and how executives can successfully respond to troubles.

What are some symptoms that may signal bankruptcy or financial trouble for businesses?
One warning sign occurs when a company stretches its accounts payable in order to obtain more working capital. Another warning sign is a company’s relationship with its bank. One should be alarmed if a banker places their loan in a division called special assets. This means the bank thinks the company may be in financial trouble and have turned the company’s loan over from the relationships manager to people who specialize in turning a loan back into cash.

In some instances astute employees know what is happening before senior executives realize the financial troubles. If some of the company’s most talented people are heading for the door it may be a signal that there are problems.

How should a company and its executives respond to such warning signs?
They should create a short term forecast to figure out whether the problems are a short term issue. Such issues may occur when a customer does not pay the company because they are unsatisfied with a company’s work or they went into bankruptcy. If it is a short term problem, then it will solve itself if the core business is strong. If it is a more systemic problem such as the inability to price your product in the marketplace because of price lock, then it is serious and you need to speak to a professional with experience that can help executives think through problems and issues.

How do financial problems affect the individuals within a business?
Troubles become a total distraction away from the core business. Managers of the company spend all of their time shaking the bushes trying to collect money from customers or holding the vendors at bay so no one has time or energy left to focus on growing or strengthening the business.

Financial strain becomes a challenge for the leaders to maintain good morale and to get employees to work. If you believe in the company and the people you work with, these strains may become an opportunity for advancement. Their may be layoffs and more hours worked but it might be to your long term benefit to stay and seek advancement.

How can executives prevent their company’s financial strain from affecting their employees and productivity?
Executives should be honest with their employees, although it is not practical to tell every employee every detail of what is taking place. It is important to find a balance between openness and not causing panic. Employees will be worried about how the strain affects their life. An example would be if payroll is missed or if a bank bounces a payroll check. This would cause mayhem for a company.

How can executives avoid personal liability in connection with a business failure or bankruptcy?
Shareholders and top managers often guarantee debt within a company, making it difficult to help save a company and help managers deal with guarantees. These guarantees are not meant to be a collection device for the lender but rather to make sure the executive is the person worrying about how debts will be satisfied. These people can earn their way out of such debts by saving the company or helping the bank sell the company. Executives should not bank where they borrow. This is because the bank can freeze personal accounts to recover funds needed from the company.

It is a manager’s duty and challenge to do what they can to ensure the company succeeds while at the same time making sure they do not expose themselves to personal liability.

How can a company rebound during and after financial struggle?
The key is communication and confidence. You should communicate with your staff and let them know there is a plan. The lender in the situation will want a timeline and vendors and suppliers may be able to stand still or double down if executives are able to show them the light at the end of the tunnel and a plan to get to the light. Convey confidence that an end to financial strain is in sight.

MICHAEL O’NEIL is a director for Sommer Barnard PC which focuses on business workouts, insolvency law, commercial litigation and nonprofit entities. Reach him at mailto://moneil@sommerbarnard.com or (317) 713-5508.