Avoiding Chapter 11 Bankruptcy: Learning from the Automobile Bailout

Most Americans are not pleased with the developments in the state of the automobile industry, since millions of people face losing their jobs.

The plight of the American automobile companies as they seek a bailout is a valuable lesson for companies that wish to grow their businesses. Running a business is not an easy job and requires following a business plan as well as periodically reviewing the direction the company is taking. If the company is experiencing losses, then a review of the plan is necessary.

A Team to Restructure the Company

In order for the company to be profitable, there must be a competent group of individuals involved in the business planning. This includes a sales person, a marketing person, and a manager. It would also help to have someone who is well versed in economics or finance, and information technology. The larger the company, the more experts are needed.

The chief executive officer must be skilled in the day to day operations of the company and the leader must be skilled in motivating people in order to bring out their best abilities. Because there are so many personalities involved, the leader must be a skilled negotiator. The leader and the chief executive officer are not the same individuals.

When the company needs to reorganize because of the inability to be competitive resulting in a lack of assets to cover the liabilities, the leader will be a key person in this process, as he/she will be the one to gain the cooperation of everyone involved. If this process fails, it is likely that the company will fold and risk going out of business.

The Business Plan

In the United States, once a company files for Chapter 11 bankruptcy, the company can be given the opportunity to restructure rather than to liquidate. In this case, the company must present a strategy to the bank detailing how they will reorganize. Many companies sell a portion of their assets as part of the reorganization and consider insolvency administration for the development of a strategy.

As the process continues, it may become evident that any plans for solvency are not possible if the company cannot obtain the sources of income that it needs to stay in business. This is what the automobile companies faced as they experienced difficulty in obtaining loans from banks. In this instance, insolvency is inevitable if business owners cannot obtain financing.

Capital Requirements

According to James Routledge and David Gadenne, authors of The Effect of Changing Firm Characteristics on Capacity to Restructure, “firms with more attractive earnings prospects are more likely to obtain funds from external borrowing which assists them to emerge successfully from bankruptcy.” This means that if a company is able to borrow money from a financial institution, it is likely to survive.

There are three ways that businesses can correct the problem with insolvency. Business owners can sell their assets to raise money for the firm, they can renegotiate their debt to be deferred to a later date or reduced, or they can make claims against future cash flows generated by the assets. However, if a company has gone this far, as in the automobile bailout, the chance for solvency is pretty slim.

In conclusion, if business owners remain open minded and address reasons for losses early in the game, they are more likely to retain the business.

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