Early Warning

If is difficult for the principals, the owners to take an early warning. The reason is the they are accustomed to ups and downs. However, the is a point of no return, a point at which it is no longer feasible for a business to pay its past due debt even if normal cash flow returned. The trick is to identify that point early on so that the money that is still available can be used to either fund a Chapter 11 or pay the creditors who have recourse against the principals.

In the declining business, each fall in the market is accompanied with loans. If these loans are not paid off with each subsequent rise in the market, the debt becomes like a ratchet where each click tightens the noose just a little. And much like the ratchet, at one point the head of the bolt will break and the body of the screw cannot then be removed. The goal is, of course, to know when to stop tightning and carefully remove the screw. This is the mitigation of damages, or stop-loss - damage control.

How close one is to that point is far from evident in everyday operations.

Some indicators are delinquent employment taxes, personal support of the corporation (this conceal the true nature of the problem better than anything), lack of flexibility in the bank account; for instance if there is only $1000 left in the bank account after the wages are paid, there is a serious problem, floating checks, factoring and no wages paid to the principals.

When these things happen the corporation may be just about to use some very precious remaining resources in a very illogical way.

Charles Chesnutt