Who Else Is Going Bankrupt This Year?

Last year alone, exactly 123,103 Canadians and businesses went bankrupt. That makes the odds pretty good that you know someone who went under!  Pretty close to home isn’t it?

Bankruptcy is one of those nasty expressions I think of as a four letter word.  No one wants to think about it let alone talk about it but in today’s economy, it is a cold hard fact! There are, however, four critical action steps you can take now to avoid becoming a bankruptcy statistic. Find out what they are before it’s too late.

I got to thinking about bankruptcy the other day when my wife and I were discussing the cost of housing.  Three of our extended family members are currently moving into larger homes and we both asked “how do the young people today afford $500,000 + homes”.  The fact is most households rely on two incomes to pay the mortgage, which begs the question, what happens if one loses their job or is laid off. 

When the Brown household took out our first mortgage we vowed that our monthly payment would not exceed one of our salaries. That way if one of us lost our job we could still make our mortgage payments.  We’ve always maintained this rule, but in today’s economy it’s hardly possible for most couples. Income certainly has not increased at the same pace as housing costs so families have to take more risks if they want a bigger home.

Why do I concern myself with this?  When you look at the statistics you have to wonder if we are prepared for the financial responsibilities ahead.

Sometimes bankruptcy is beyond our control and of no fault of our own, but in business there are a number of steps you can take to minimize your risk. This is particularly important in the Motorsport and Marine industries where sales are seasonally based and often weather dependent. Here’s what you must do.

  •          Prepare a Business Plan:  It all starts with preparing a business plan before the start of your next fiscal year.  Based on history and your experience prepare a monthly sales forecast for units, parts, accessories and service.  Using that forecast, expand it into sales and cost of goods sold and then list out your monthly expenses.
  •          Prepare a Cash Flow:  From your Business Plan prepare a monthly cash flow.  Since most of the product in the Motorsport and Marine industry is financed your cash-in should mirror your cash-out.
  •          Establish Your Breakeven Point:  Now that you have your Business Plan in place calculate what you breakeven point is for sales.  You should look at this not only for the year but by month as well.  The factor you should determine is what is the minimum number of sales you can make on a month by month basis to pay the bills.  You should also apply this to your sales gross margins.  If you have forecasted a 10% gross margin on unit sales, what happens if it drops to 5%?
  •          Establish Your Cash Flow Requirements:  The fact that your business is seasonal dictates that you will probably be “cash short” in your off season and “cash over” during in season.  You must identify what your maximum cash shortage is during the year.  Now apply your breakeven point that you factored in from your Business Plan to establish the effect on your maximum cash shortage.

By doing this financial analysis you have painted a picture for the next year of what it is going to take to not only be profitable, but the level of risk you will face if sales do not materialize as you forecast.  It allows you to ask and answer a number of key questions.

  1.     What is the minimum number of unit sales I need to stay in business and at what gross margin?
  2.     What are my cash flow requirements?
  3.     Do I need to increase my operating line at the bank to cover my cash shortage?
  4.     Can I borrow additional funds?
  5.     How much net worth do I have in the business to sustain a poor sales season?

Most bankruptcies occur because many business owners keep their heads in the sand and fail to plan. Understanding the risks allows you to plan for the worst case scenario and thereby avoid that dreaded four letter word. 

Many bankruptcies happen over an extended period of time but for some…..it can happen in a heartbeat!  

If you’re concerned and think you may need help to avoid becoming a statistic then please contact me for a free consultation. Sooner rather than later!!!


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