Eight factors for CPAs to consider in bankruptcy
What CPAs can expect in workouts and lending today?
If ever an economic period was destined for America’s history books, it’s this one, according to Jerry Mozian, a turnaround specialist writing in this week’s CPA Insider.
Mozian
“After a long run of living above our means, the concept of credit is being fundamentally revisited,” he says. “It seems we have entered not just a short period of revenue dislocation, but a seriÂously challenging situation for the rest of 2009 and well into 2010.”
“When the dust settles, our nation will emerge a more value-oriented society – one that better understands leverage and restraint,” Mozian says. “Future generations can avoid the mistakes we’ve made by learning how we overcame them.”
For CPAs, that means understanding a little bit more about liquidity, insolvency, bankruptcy and workouts.
According to the American Bankruptcy Institute, business bankruptcies have increased dramatically – from 4,086 in the first quarter of 2006 to more than 11,504 in the third quarter of 2008.
According to Mozian, before filing bankruptcy, CPAs should:Â
- Determine your desired outcome. The end result of the bankruptcy should first be discussed with company advisors. Certain questions must be answered, like is it better for stakeholders to reorganize the company or liquidate assets?
- Choose favorable options for your situation. If a reorganization is feasible, should you enter Chapter 11, and then propose a reorganization plan, or would a pre-packaged bankruptcy be better?
- Think about your cash position. Is there sufficient cash to sustain the company? This includes cash on hand, cash to be collected, or cash from a DIP (debtor in possession) loan.
- Revisit benefits of your long-term contract terms. Being able to accept or reject contracts such as real estate or equipment leases is vital, particularly when locations must be closed or long term leases no longer make sense.
- Consider your supply chain. What happens if trade creditors are not paid? If the goal is reorganization, then ensuring a future supply chain is important.
- Consider your customer base. Will the filing of bankruptcy significantly disrupt your customer base?
- Evaluate your approach to unsecured creditors. Review the number and demeanor of unsecured creditors serving your business. It’s easier to negotiate with a small number of them.
- Examine the strength of the management team. Is your management team prepared for the rigors of bankruptcy? If not, the process has a low probability of success.
Read Mozian’s full article here.
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