

How to Go Bankrupt - bussetta
http://jacquesmattheij.com/how-to-go-bankrupt

======
gregpilling
There are three accounting reports that every business owner should
understand. Profit-Loss, Balance Sheet, Statement of Cash Flows. Most small
business people that I have met only look at the Profit-Loss (P&L) and do not
look at the other two. They are the three legs of a stool. The P&L tells you
how much money you made (or lost), the Balance Sheet tells you what the
balances are on your accounts (bank balances, monies owed to you and monies
you owe to others), and the Statement of Cash Flows tells you where and how
the Balance Sheet changed and where the money moved to.

If you are C level at your company, spend at least an hour a month
understanding these three reports. If you don't understand something ask your
accountant or Google. As the OP says, there are more than just employees jobs
riding on these reports (or what they represent); their families are also
depending on good numbers. Sometimes the reports are not good news - they key
is not to fool yourself, but to understand the truth. If you understand the
truth you can make better decisions. If you do not understand the truth, it is
very hard to make a good decision.

Some days you are making money, but you have to wait for accounts receivable
to get paid. Some days you have a bunch of money in the bank because of new
funding, or a customer pre-paid, or you haven't taken care of all the payables
yet. Just don't lie to yourself, and don't get lied to.

It is not that hard to understand the three reports; they are basic arithmetic
and counting - the key is to just do it. Personally, I look at it every week
after doing payroll. You can choose your own schedule, just choose one and
look at all three reports. Even if you only do it quarterly, you will at least
know what is going on.

~~~
socialist_coder
It blows me away that that C-level staff would either ignore or not have the
smarts to understand these basic reports.

The recent story about the parenting ecommerce store (I forget the name) where
the CEO didn't understand the financial reports was crazy. It's high school
level math!! How can you feel good about making decisions when you can't even
do the basic math to figure out if you're gonna be profitable or not?

How do these people get to their position without being able to do that type
of stuff?

~~~
gregpilling
The audience of HN is programmers. Why would you be amazed that someone could
code up a success, and then have a bunch of employees and an accounting
department before they knew it? I have known Phds that had no experience
reading financial statements of their companies. It is not that they CAN'T do
it; it is that it has never been a priority.

In any small business (tech or not) there are always many, many things to do..
so my advice is simply about which of the hundreds of reports that your
accounting software spits out that you should look at. To be honest, I did not
look at Statements of Cash Flows for the first 10 years I was in business. It
is less essential to watch SoCF if you are doing Cash accounting instead of
Accrual accounting, and if you have positive cash flow it is not as dangerous
to ignore it. But when the crap hits the fan, you should know what is really
happening. The OPs post was about a business in decline.

~~~
hga
If you're starting a business, especially if you're a programmer who's not
afraid of basic math, shouldn't you spend a day or so learning the basics of
accounting?

Granted, that might not tell you to "watch cash flow like a hawk", but ...
say, the moment you either have a paying customer or hire an employee, you
have a minimum duty to not crater your company out of sheer ignorance of the
basics.

------
cperciva
_"A lawyer that you do not pay is not working for you"_

I'm not sure I agree with this. If a lawyer agrees to represent you, they have
a legal and professional responsibility to act in your interest regardless of
who pays the bills. In the common case where they are also representing the
person or company paying their bills, they should be clear on how a conflict
would be resolved -- usually with wording along the lines of "in the event
that a conflict arises, you understand and agree that we would terminate our
representation of you, and we will assist you in finding other counsel".

The most important question to ask is probably "do you _represent_ me, or are
you merely _advising_ me?" -- although a good lawyer will make that clear from
the start in order to avoid any possibility of confusion.

(The above is not legal advice, and I am not a lawyer. I have however been a
party to such joint representation.)

~~~
jacquesm
In this particular instance there was a lawyer involved that clearly did not
understand things the way you do and having an independent lawyer involved
when there are potential conflicts of interest between the various roles is in
my opinion a good thing.

Of course there are lawyers that are capable of riding that fine line and
making sure that everything is perfect but when in doubt it can get expensive
really fast and in the end you are responsible, not your lawyer.

Paying a lawyer out of your own pocket in case of such doubt is a very good
way of securing that there is no conflict of interest.

For obvious reasons I can't go into the details of why in this particular case
this was essential so that's a pretty weak defense but I will stand by my
words.

I agree with the question, still in a fluid situations such as these it is
very easy to have such conflicts enter and be unnoticed long enough for
trouble to arise.

Err on the side of caution.

------
peteforde
One of my mentors taught me that a company that dies has usually been killed
at least six months before it knows it's dead.

He also beat a simple credo into my mind: if you think that there might be a
problem, there's a problem.

------
arethuza
"A lawyer that you do not pay is not working for you"

That's pretty good advice on a personal level - in the early days of a company
it is easy to view your company's lawyer as "your" lawyer. However, as a
company grows and has external investors you may reach a situation where your
own personal interests do not coincide with those of the company - this can
lead to rather unpleasant surprises!

I guess the trick is spotting the point where your own personal interests and
those of "your" company diverge _without_ spending huge amounts of money on
redundant legal advice.

~~~
jacquesm
Rule of thumb: if you feel that your roles as shareholder, executive and the
corporate interests conflict to the point where you would take different
decisions depending on which hat you wear.

After all, the decisions flow from those interests so they're a good
benchmark.

~~~
arethuza
The specific case where it got a bit exciting for me was actually in an IPO
completion meeting - the company's lawyers had prepared some document that
wasn't needed until the next day that had been phrased in a way that would
have been an immediate (and very large) tax liability for the founders. One of
our, extremely smart, non-execs noticed this wording and dragged us three
innocents off to a meeting room where he pointed out what this would mean -
pretty much immediate personal financial doom for the founders.

It all came down to one sentence in a document that wasn't needed until the
next day - we, as individuals, asked for the document to be changed and they
said no. The "company" had no view in the matter.

We had to threaten to pull the whole IPO to get the company lawyers to change
a few words in a document. The _only_ reason they didn't want to change the
document was that they had already prepared it and didn't want to have to edit
it again.

Fun and games!

~~~
jacquesm
Good catch!

~~~
arethuza
I must admit that I wasn't paying attention - I was sitting coding...

------
woodchuck64
> By keeping [the CEO] out of the loop the CFO was able to hide the problems
> (including some irregularities involving private accounts and the corporate
> current account) from his partner.

Seems like you're saying a good way to go bankrupt is to have a criminal CFO.
Aye, that will do 'er.

~~~
jacquesm
That was a minor (if contributing) factor, the bigger problem was the
unprofitable strategy of expansion.

The irregularities were what triggered the review, the actions by the
participants hastened the demise of the company but as far as I can see with
the information I've got this one was unavoidable. Which totally sucks.

Companies have survived with people raiding the till, but no company will
survive basic un-profitability in the longer term.

------
jasonhanley
"Turnover is meaningless if more business decreases your profitability" -- So
basic, yet so frequently overlooked.

You can't just "make it up on volume."

------
sokrates
Oh, I thought this was a wittily-titled article about Golang.

