I understand the threat of bankruptcy more than most, but little did I know that experiencing it first-hand would lead to a profitable new business opportunity for me.

In the late 90s I was running a business, which, for various reasons including mismanagement on my part, ran into difficulties, accruing $700,000 worth of debt. The only problem was that I only had $100,000 in the bank and as a director, my wife and I became personally liable for the business’ bills, not to mention the personal guarantees I’d signed with suppliers.

My choices were simple; go bankrupt – something I did not want to do, given the fact I’d lose my home – or negotiate with my creditors. We sought counsel from lawyers and other professional advisors, but none of them could help negotiate a reduced settlement without us going bankrupt. I decided to take on the challenge myself, and, out of necessity, I called up 50 of my creditors, and negotiated, hard. If I went bankrupt they would end up with nothing. However, we managed to strike deals with all of them at approximately 10 cents in the dollar, and I was able to fund my debts with what was left in the bank.

Unknowingly, I had become my first client. Looking back, I was incredulous that there was no professional firm that could negotiate settlements with creditors without having to enter into some sort of bankruptcy. I decided to test the waters and start helping out small businesses and individuals settle debts. Several years on we’ve now have a growing team and have helped hundreds of businesses and individuals avoid bankruptcy.

All this means that time and again I see business owners making the same financial mistake, and while this is a huge topic, here are five issues that I see most frequently:

1.    Don’t stray too far from your business plan

They say the only benefit of not planning is that failure comes as a complete surprise. However, I can’t stress enough the importance of having a business plan, and sticking to it, and you’d be surprised at the number that either don’t have a plan, or those who write one and then never read it again. Put simply, businesses that plan properly make more money than those that don’t, and they also survive longer.
 
2.    Cash flow

The one thing that will kill you before anything else is cash flow issues. A good starting point should be your customers – any debtors should be at a level you’re comfortable with as slow payers can cause real problems to your cash flow if not kept on top of. Look at ways of making your processes as efficient as possible. It’s also important to spot the warning signs if you think they’re in trouble themselves financially. Be diligent in collections and have a solid receivables plan and policy in place. Remember, a sale is no good if you don’t get paid for it. So for clients you’ve black-listed as slow payers, get payment up front first.

3.    Weekly book keeping

Few of us like admin work, but it’s important to keep your books as up-to-date as is possible, as there could be all kinds of financial nasties lurking in there. Make sure you set aside time on a weekly basis to do this, as it will save you a huge amount of time and money later on. It will also give you a very clear picture of where your business is financially, particularly when it comes to bank balance and debtors, allowing you to be much more fleet-of-foot and able to react accordingly.

4.    Prepare for a bump in the road

You should be prepared for slow business periods or the loss of a key client, covering weeks, months or even years. Review a best and worst-case scenario, and strengthen relationships with your creditors. If you think you’re going to be late paying, then let them know in advance. This is particularly important for credit cards, tax office payments and loans – it’s always much better to be open and honest from as early as possible, and chances are they’ll be more flexible than you might imagine. Also, rather than spending, make sure you’ve got a good cash buffer in place – ideally three month’s overheads.

5.    Manage your own debt levels

Your own debt should also be managed as much as possible, even if business is booming and cash flow is good. As we all know, this can rapidly change. In general, stop spending, stop borrowing, and start focusing on getting rid of debt. As we can see with the recent financial problems experienced by mining magnates Nathan Tinkler and Andrew Forrest, their companies are so debt laden that any swing in the share price or the iron ore prices reduces their asset valuations and affects their cash flow. When their cash flow is affected, they start to have problems paying loans and bills on time. Whether you are Fortescue or you are Bob’s Hardware, too much debt is very risky. So don’t bet the farm.
 
Christian Oey is founder and CEO of www.Nobankruptcy.com.au