Avoiding bankruptcy and saving your business- learning to use the parachute before you need it

A recent blog article in the New York Times reflecting on the lessons to be drawn from the stock market gyrations in the last week contained this quote: " the time to prepare for a "crisis" is long before you find yourself in one. It's not a good idea to figure out how a parachute works after you jump out of the plane." http://bucks.blogs.nytimes.com/2011/08/08/your-neglected-stock-market-backup-plan/. Right away, I was struck how central this idea is in any effort to keeping a business or a household afloat. Too often, I see people who start looking at what is wrong after the fact, when things get out of hand.


A case in point is the business owner I saw recently who only now realizes that his business is failing because he has run out of money to keep it going. Typically, he has unpaid taxes, and has been juggling demands from unpaid suppliers. It became clear after a half hour that he had no idea what his expenses were or how he could pull out of the hole he was in. Financial records were non-existent, and had been that way for a long time. He admitted he really didn't want to know, and had been "robbing peter to pay paul" for a long time.

In today's economy, staying solvent and staying afloat is most of the battle. Yet time and again I see small business owners who have never established the budgeting and financial record keeping they need to know what is going on, week to week if not day to day. These people have no idea what running their business actually costs. As a result, they can easily under-bid a contract or enter into a money losing deal. They end up losing money on each sale but "making it up on volume".

So what should be done? Set up a system of up to date money management and record keeping. Do this as soon as possible. When I have had to run a failing business as Chapter 11 trustee, I quickly learned that I needed to know what was going on as soon as it happened, because when things are tight, things can spiral out of control quickly. 

It's not that hard to set up an effective system. Nowadays, even those without bookkeeping or accounting knowledge can use software like Quickbooks or even Quicken Home and Business (there are others but these are the simplest I have seen) to set up budgeting, expense and income tracking. Even if not perfect, any system is better than none. And if you have ever used a checkbook (a quaint 20th century paper based financial planning device) it is easy to get started. Better yet,  get some professional help to set up one of these systems and take a course or pick up a video or book about how to use them. Guides and resources abound,  on the Internet or at the library or in the bookstore.

Back to my theme. The time to do this is when you do not need it. When the business is starting up is a great time to put financial record keeping systems in place. If the business is running, there are periodic slow times. That is a great time to work on putting the financial house in order.

And there is no substitute for knowing how to use these systems yourself, at least to some degree. The successful small business owner hires skilled people to handle tasks like this, but also knows enough of the basics to take over in a pinch (again, preparing for a crisis, like when the bookkeeper quits). It's your business. You need to know how it runs.

You can do this and invest the time and effort it takes, and be on top of what is going on when the crisis hits. Or you can end up needing a bankruptcy lawyer when the accumulating waves of debt overwhelm you and things have gone past crisis to life-or-death critical. When that happens, the options narrow and the risks grow large. The time to learn how to use a parachute is before you need it.