Preparing for the Worst (And Best)
ADAM BIRK
Cape Girardeau, MISSOURI
Prepare yourself for a shock to the system because this one is a doozy; the best way to avoid bankruptcy is to become more profitable and pay off debts. Shocking, I know. You are likely thinking, “Thank you Captain Obvious,” to which I’d say, “You’re very welcome.” All joking aside, the statement “be more profitable and pay off debts” is basically useless by itself as it provides no practical implications. But I implore you to keep that mantra in the back of your mind during this article because “be more profitable and pay off debts” needs to be the guiding principle behind every decision moving forward if you need to avoid or prepare for a bankruptcy. My previous two articles have discussed Chapter 12 Bankruptcy for the family farmer. If you would like more details on bankruptcy, please go back and read those, but as promised, this week will discuss techniques on how to avoid or prepare for bankruptcy.
First and foremost, KEEP RECORDS. Keep records on everything you feasibly can but most importantly your finances. If you immediately think “yah I’ve got that” or “I’m good, my accountant does it,” stop and think again. Everyone these days has some kind of accounting done but there is a very wide range of quality in accounting. The shoebox method, merely turning over receipts and bank statements to your accountant, or catching up on accounting every couple months are all methods that do not cut it anymore. We have seen all of these methods in prior bankruptcies. The reality is that if you do not keep up with your accounting records week by week then you will forget what the money was actually used for and your records will be inaccurate. If someone unfamiliar with the detailed workings of your farm is doing your accounting, they do not have the knowledge to accurately record this information.
In a prior bankruptcy, the client gave all their receipts, checks, and bank statements to their accountant each month. The accounting firm did nothing with these records until the end of the year and then threw them together. These records were blatantly inaccurate and the balance sheet did NOT balance. For those unfamiliar with accounting, this is a complete failure of the most fundamental principle of accounting. Point is, double check the quality of accounting being done because a quick look at the quality of this farm’s records and it was no surprise they were filing bankruptcy. The old saying is “junk in, junk out.” If the person doing your accounting can’t accurately itemize each transaction (junk in), then don’t expect to learn anything useful from the information (junk out). As a rule of thumb: If you can’t analyze and learn something valuable from your accounting, then why are you wasting the time and money to have it done at all?
As I discussed in the previous articles, filing a bankruptcy requires that you gather and organize all of your financials within standard accounting documentation, so that the court can understand your financial situation. If the task of figuring out your finances seems overwhelming and out of control, you are probably correct; but that is no reason to not tackle the problem and take back control of your business. You can either do it now before you have to file bankruptcy, or you can file bankruptcy and pay an attorney to figure out your finances. Bankruptcy can help you gain control of loan payments and the creditors that are breathing down your neck but it does not remove the work required to understand your finances and conduct proper accounting.
I have so much to say on this topic but limited space. The important thing to remember in all of this is to consult with an attorney long before you need to file bankruptcy, you may save thousands of dollars by properly preparing and maybe even avoid bankruptcy completely. Here is my rapid-fire list of practical ways to be more profitable and pay off debts:
1) Talk to your spouse and/or business partners about the situation and make sure there are no debts or expenses you are unaware of. 2) Open all your mail and keep up with delinquent and foreclosure notices. If you bring an attorney a notice that the bank is foreclosing next week, still bring it in, but it’s a little too late to stop it. 3) Sell unnecessary equipment, livestock, etc. This cash should go straight to paying off debts. 4) Pay attention to interest rates and pay off the highest rate first. Most importantly, pay off or condense credit card debts. 5) Analyze all expenses in depth, cancel any subscriptions not being used. 6) Develop SOP’s (Standard Operating Procedures) for all major activities. Not saying you have to write down every SOP but observe how employees are doing their jobs and then correct the inefficiencies and get all employees following the same procedures. 7) Fire or place some kind of restriction on the employee(s) who make way too many supply runs. 8) Review fertilizer and chemical application receipts for accuracy. The farm I used to work on would find $10-15,000 per year in receipts billed to them that were not actually theirs. 9) Plan ahead (by keeping records) and buy in bulk at discounted prices. 10) Re-negotiate terms and find new vendors and elevators. If vendors want to get paid, they will negotiate. Talk with all the elevators and know your shipping cost to truly know where you can get the best price. 11) Learn accounting yourself, keep records on everything, and learn something from the records. 12) Ask why. Spend a full day looking at every piece of equipment you have and every procedure you do and ask why you have it or why you do it specifically that way. You will create a list of savings and increased profitability so long you will likely be overwhelmed. Narrow this list to the low-hanging fruit, those easiest to implement with large rewards, and do those immediately. Next slowly tackle and implement the rest of your list, always focusing on increasing profitability and paying off debts.
Funny enough, because the mantra behind avoiding bankruptcy is to increase profitability and pay off debts, the same techniques that help you avoid bankruptcy (the worst), is exactly the same techniques you implement to build a very successful business (the best). It’s just a matter of continually asking why and then reaching up to take the low, medium, and high hanging fruit. This concludes a three-article series on Chapter 12 Bankruptcy. If you are considering bankruptcy or could use a business advisor, consult with your attorney. If you have questions regarding Chapter 12 Bankruptcy or have topics you’d like me to discuss, please email me at abirk@birklegal.com. This article and the statements made within are intended for informational purposes only. In no way should this article and the statements made within be construed as legal advice. ∆
ADAM BIRK: BIRK LAW FIRM, LC