COMPLACENCY AND DENIAL – IS BANKRUPTCY AVOIDABLE?

Smugness breeds complacency and denying this truth may be dangerous for any corporation. Becoming overconfident and content even with wrong decisions or actions and denying this fact for a long period of time may result in financial setbacks leading to bankruptcy. Bankruptcy is never an answer to complacency. If a lie is told a thousand times, it becomes the truth but in the corporate world wrong actions and not accepting reality may lead to huge financial losses. As a matter of fact, the act of declaring insolvency should be the last step when all resources for reviving the business are exhausted.

 Business-and-lossesThe state of insolvency does not come overnight but it is the outcome of a negligent and callous attitude towards managing a business. It is a process of incompetency and denial which results in making business sick. It happens due to mismanagement, misappropriation and lack of far sightedness. Companies also enter bankruptcy because of the overconfidence of a few and their haggard meritocracy.

As human beings, before becoming sick we all receive warning signs from our bodies, such as a mild temperature, a cough, feeling cold, a headache, nausea, weakness, pain etc. The moment we acquire these symptoms, we know that something is wrong and we take precautionary measures to overcome the aggravation of the symptoms. If symptoms go beyond our control then we rush to the emergency ward where medical experts examine our body and prescribe medications to control the symptoms or eliminate the disease. In a worst case scenario, a patient can be admitted to an operation theatre or be put in an intensive care unit.

The same way, there are key indexes to measure the performance of a company. These indexes can routinely measure the impact of key management decisions, operational and financial health of an organization. They provide early warning systems in case any part of the business is not performing as per the measure. Based on such warnings, a short-term or long-term correctional strategic plan can be prepared. These strategic plans are executed and monitored till a business reaches the threshold of recovery or has overcome the constraints. In management consulting, I vigorously recommend that prevention is always better than cure. In order to maintain the overall health of the company, a periodical diagnosis or annual check-up is must. The cost of preventing the loss in profit is insignificant in comparison to the cost of fixing a problem.

strengths-weaknesses-buttons-shows-weakness-or-strength-100206717In a worst case scenario, the turnaround strategy reverses the cause of distress, resolves the financial crisis, achieves quicker improvement in financial performance, overcomes all internal constraints and regains stakeholder’s satisfaction. This is done by diagnosing the root causes by using various tools and techniques.

These tools and techniques include SWOT analysis, PEST or PESTLE analysis, critical success factor analysis, process activity analysis, comprehensive organizational capacity analysis, management capacity analysis, psychometric analysis of employees, value stream analysis, cause & effect or fish bone analysis, balance scorecard, survey, interview, brainstorming etc.

Hence, being complacent and remaining in a state of denial for a long period of time is inevitably going to invite bankruptcy at the cost of shareholders stake and employees futures. In order to prevent the slide towards bankruptcy, it is important to find the malignancy and remove it before it is too late. In my opinion a bankruptcy can be avoided by using the services of an expert in business turnaround which will result in reviving the company, saving jobs and adding value to the local economy.

 Suman Saran Sinha, CMC

Certified Management Consultant
http://www.amcltd.ca
 
Advertisements

About SUMAN SARAN SINHA

I am a former banker, financial consultant, and an attorney before the High Court of Mumbai and Supreme Court of India. I have also managed several companies as their CEO and also as a management consultant in India, the Russian Federation, USA and Canada. I am a Certified Management Consultant and a member of CMC-Canada, having interest in writing articles on philosophy, trade & economy and project management.
This entry was posted in Banking, Bankruptcy, Business Compliance, Business Consulting, Business Development, Business Diagnosis, Business Management, Business Turnaround, Change Management, Complacency, Compliance, Consulting, Finance, Foreclosure, International Marketing, Investment, Management, Management Consulting, Marketing, Mismanagement, Process Improvement, Project Management, Supervision, Trade Development, Trade Finance, Turnaround Management, Uncategorized and tagged , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

8 Responses to COMPLACENCY AND DENIAL – IS BANKRUPTCY AVOIDABLE?

  1. suman,
    from your experience, what role does poor credit approval play in bankruptcy?

    WalkingBear

  2. Thanks Abe for your interest in reading the article and asking question. Credit rating is just one of the components in managing finances of a business. If it is ignored for a long period of time then obviously it will have a negative impact on the company. However there are ways to fix it and put the company on right track.

    As I have mentioned in my article that the stage of insolvency does not happen overnight but it is a process. This process can be arrested by taking preventive actions by going through a periodical diagnostic process.

  3. Thanks Suman,
    When you say “Credit rating is just one of the components in managing finances of a business.” are you referring to the company’s rating or that of it’s customers?

    WB

  4. I think we are talking about company’s rating.

  5. OK, thanks.
    A company’s credit rating will impact on it’s ability to secure needed lines of credit from lenders and from vendors/suppliers…so that’s important .
    But…
    With 95% or more of all BB/Commercial Sales involving payment at a later date and with the resulting A/R being one of if not the largest asset a business has ; as well as being the greatest source of working capital– the quality or lack thereof of customers’ credit performance can be a major component in a business bankruptcy.

    WalkingBear

    PS that not to say that all bad debt is bad or equal.

  6. I understand your concern Abe. Prudent decision in managing A/R is the key to success. If the quality of an A/R is overlooked or if the A/R is allowed to go beyond a reasonable period of time then of course it will affect the financial performance of a company. However a timely action together with placement of KPI’s on every and each A/R and their constant monitoring may avert the insolvency of a company.

    Customers do not default overnight. There are signs which needs to be assessed and evaluated on a regular basis. As per my experience, when company’s do well financially, they become overconfident and ignore the warning signs. Therefore they should adopt the practice of diagnosis of their working by a third party at a regular interval if they wish to remain healthy for times to come.

  7. Suman,
    you wrote “they should adopt the practice of diagnosis of their working by a third party at a regular interval if they wish to remain healthy for times to come.” Spot on.

    A penny of prevention is worth dollar of cure.

  8. You are absolutely right Abe. I am honoured to discuss with you on the topic. Cheers!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s