Bankrupt.Me-Not. Book of Problems. Yuriy Yavorsky
your stocks and reserves away until you need to start all over again.
SECTION 2. ALL OF A SUDDEN
It is not true that bankruptcy cannot be predicted.
So why does it usually strike all of a sudden?
PROBLEM 6
Given: businesses are always on the lookout for ways to survive beyond going bankrupt, often finding themselves on the brink, with all other options exhausted. Banks won’t refinance, interest is accruing on the cost of past borrowings, debts for materials exceed future earnings while wages and taxes have not been paid for months.
Question: why does the practical application of bankruptcy procedures for business turnaround in the 21st century Russia remain at a most primal level? Why do companies avoid any procedures that can lead to a loss of assets and why do creditors try to seize those assets by hook or by crook in order to sell them for a song and get at least something back?
Solution: It is evident that the legislation and legal practices must be improved. Many entrepreneurs I know have had to prove to banks time and time again that a payment break or debt restructuring can rejuvenate their business or even make it more successful. This has been reaffirmed in practice – you must fight to the last ditch to prove that you can turn things around, go request payment holidays or refinancing, try to convince everyone that you can redress the situation, and never give up on your business if it is still alive, look for a way out. Do not initiate your bankruptcy, let the banks or tax authorities do it for you if they fail to be convinced. At least you can buy some time, which is so valuable in this fight. You will need it in the course of protecting your assets.
PROBLEM 7
Given: bank officials are indifferent and unwilling to even listen to reasonable proposals. Banks are never concessionary, so they must be the last point of contact.
Incidentally, banks are usually more alert than a soon-to-be bankrupt. Once they catch the wind of trouble in your financial affairs, they will act swiftly and professionally. They will have already got you to sign a personal surety and have made all attempts to put an obligation on each of the adult members of your family.
Nothing ever hurts an entrepreneur more than realizing that their business could cause their nearest and dearest to lose everything. Agents representing banks or other creditors often act ruthlessly, without compassion or intent to compromise.
Suddenly you realize that those with saccharine smiles who persuaded you to take out loans at extortionate interest rates of 15—25%, who invited you to free business breakfasts, discussion groups, and voluptuous parties with free buffets and champagne, where you were awarded prizes as the best business owner, have been, in fact, ‘fattening’ you until the time when your assets become more attractive to them than yourself.
Question: are you suddenly aware that this is the end? I’m sure you are. No one I know who has gone through or is going through bankruptcy could have imagined three years prior to bankruptcy that an apartment given as a birthday present to their darling daughter (if the deed of gift was executed less than 1,095 days ago) would be taken away, auctioned off, and sold.
Example one: my acquaintance once told me a story about a bank lawyer. She was certain she was entitled to slander the debtor in court and was being cynical to the point where she would not hesitate to triple the debt amount just to prove in court that the debtor was a swindler. That the debtor had been borrowing from the very same bank for more than 20 years without a single day of payment delay, largely paying back the loans taken out for business development at an interest rate of 15—25%, she would not even want to talk or hear about.
Example two: a bank has been lending money to an entrepreneur for many years, using the property built with the loans as collateral. When the crisis collapsed sales, the bank foreclosed on the entire property for a quarter of its value, refusing to revalue it and leaving the defaulter in debt to other creditors. This is how a successful property owner turned into an entrepreneur owing to everyone.
Solution: do not give up and study the intricacies of bankruptcy procedures most thoroughly. This fairly uncomplicated subject does not require a university degree, rather diligence and a competent hands-on lawyer are needed.
SECTION 3. INEVITABILITY
For many people, the inevitability of bankruptcy is a personal catastrophe above all else. Successful yesterday, bankrupt today – how do you live with it?
PROBLEM 8
Given: the issue of payment arrears inevitably looms when the difference between income and expenditure on the corkboard in your office changes sharply from positive to negative compared with the results of the previous operating month or quarter. The banking community is abundant with charlatans able to convince you consummately that all you have to do is take out a loan and all your problems will be taken care of by the bank’s capital as long as you are making timely interest payments.
Yes, there are some very talented entrepreneurs out there who are able to grow exponentially with a loan at 15 to 25% interest…
Question: but if the average profit in developed economies is less than 10—20%, how can one pay 15—25% interest rates? Only when the economy or a particular economy sector is growing, or perhaps a particular company has struck it lucky or come up with something that its competitors have not. But it is abundantly clear to the author that a business with a loan portfolio in excess of 50% of its annual turnover is inevitably heading for bankruptcy.
Solution: if a business executive or entrepreneur does not want to see a ‘black swan’ from the window one day, he should monitor the immediate future for the inevitable moment when it is no longer possible to increase the cash flow. Only a growing business can cope with borrowing, otherwise you are on a down escalator. If your turnover has stopped growing or earnings have begun to fall, the loan with its draconian interest rate must be urgently reduced or disposed of altogether.
We often believe that we are the ones to be spared. If the entrepreneur in Problem 7 (Example two – the bank foreclosed on an undervalued property for next to nothing) had sold some of his property even at a discount in good time, he would have been able to pay off the loans or reduce them considerably, and then use the remainder to invigorate his business again. But it is so hard to switch from a Mercedes to a more modest car, or to sell a country estate that is not needed at the moment! No stomach for it. And, inevitably, the entrepreneur loses the property in a court of law, with the creditors taking it away for a mere song.
Sometimes, instead of borrowing as a sole way to generate cash, you have to move your bad sellers even below cost.
Example: a friend of mine made profiles for dropped ceilings to attract customers rather than as a flagship product. He sold the profile cheaply in order to attract ‘anchor’ customers who would buy the core revenue-generating product in addition to the profile. In the end, he got so carried away with profile sales (the price was attractive and competitive!) that they far exceeded the sales of the flagship product.
The sales kept growing, but the share of loss makers in the company’s turnover shot ahead of the profitable product share.
Inevitably, a disaster called bankruptcy started looming. Before he knew it and could pull the plug on production of the