Step 10 in Avoiding Bankruptcy Determine Your Current State of Health

In a study of over 1,500 companies that we have assisted, I have concluded that the maintenance of organizational health is a dynamic process requiring constant attention. A leader cannot merely set up the structure of a company and forget about it because it will not run by itself. In the United States, the vast majority of organizations fail. If we could uncover the secret of long-term success, we could unlock the door to enormous economic expansion by redirecting all of the resources currently devoted either to trying to save or to close failing companies.

Let's begin by asking ourselves "What time is it?" at your company. Organizations with long-term health ask this continuously. To answer the question, I refer to the concept of the Corporate Clock and explain how to tell time on it.

The actions you must take to restore health are a direct response to your position on the clock. A company in crossroads has more options and a longer time-span to achieve results than one in crisis and their actions will be quite different.

The following short test will help you evaluate where your company is on this Clock. The 22 key questions enumerated here have been excerpted from a more comprehensive questionnaire that KGI uses in performing this analysis for our clients.

  1. Are there less than five layers of management from the top to the bottom of your organization?
  2. Does the top executive have an open door policy?
  3. Does the company perform annual Strategic and Contingency Planning involving all key decision-makers? Is the company actually managed by the Plan?
  4. Is there a consistent compensation system? Do most executives consider the system fair?
  5. Are the responsibilities given to the executives matched by the authority to carry them out?
  6. Does the formal organization chart follow the informal organization structure?
  7. Is there a shared corporate vision at all levels in the organization?
  8. Are the net profits as a percent of sales higher than those of the top companies in your industry?
  9. Are gross profits in the top 10% of the industry?
  10. Are accurate financial reports available before the 15th of the following month?
  11. If the reports show poor performance, do they also indicate the action you must take to correct the problem?
  12. When action is taken, do the reports reflect the impact of that action on the financial statements?
  13. Is there an integrated advertising, sales and marketing program?
  14. Is there a Personnel Manual, Sales Manual, and Summary of Financial Policies and Procedures?
  15. Does the company have excellent relationships with employees, vendors, customers, shareholders, lenders, and regulatory agencies?
  16. Is pricing tied to cost as well as to competitive requirements?
  17. Has the company been free of major lawsuits?
  18. Is there an organized program to connect top executives with:
    - the top decision-makers in the lender organization;
    - the top ten vendors; and
    - the top ten customers?
  19. Are the average receivables under 60 days old?
  20. Is employee turnover below 15% per year?
  21. Are all of the key executive positions filled with talent that you would rate in the upper 20 percentile of their field?
  22. Have acceptable phase one reports been received for all properties owned? If remediation is required, has the program been implemented, and have the related costs been built into the budget?

If the answer to any of these 22 questions is NO, then your company is probably not in the Healthy quadrant. Here are some preliminary guidelines:

  • Healthy All YES answers.
  • Crossroads One to Five NO answers
  • Conflict Six to Ten NO answers
  • Crisis Over Ten NO answers

In general, if your current ratio is less than 1.5 and/or your debt-to-equity ratio is greater than 2.0, you may not be Healthy even if you answered YES to all 22 questions. I must admit, however, that I do not know of any company that has answered yes to all questions and still had weak financials. Finally, if you have a negative working capital (current ratio under 1.0) and/or a deficit tangible net worth, you are in a crisis irrespective of the answers to the questions.

So, where are you on this Corporate Clock? Do you rate your organization higher or lower than the test results indicate? We usually find that owners and executives tend to be optimistic and are unhappy with the test scores, while professional executives tend to be more realistic.

If I could work with an inventor and design Corporate Clocks for sale, business and professional people would build a pathway to my door. The clocks demonstrate that time accelerates as companies deteriorate. Time in the Crisis Zone moves thirty times faster than in the Health Zone.

In the Healthy quadrant, everything is in control and going well. There is plenty of time to correct any future problems that might occur. In addition, in the Healthy phase, the company has developed Strategic and Contingency Plans, and so is better prepared for emergencies. There is, in effect, an upward spiral. The company in the Healthy Zone has more time, more resources and more awareness, while the company in the Crisis Zone has little time, limited resources, and no awareness. The company in the Healthy Zone is able to work with monthly Cash Flow, Balance Sheet, and Profit and Loss information to maintain control. The information is timely and meaningful so that corrective action is being taken continuously to avoid drifting into the Crossroads Zone.

The company in the Crisis Zone must work with daily Cash Flows and daily information related to all critical assets such as Inventories, Accounts Receivable, and Accounts Payable. The information is generally late. Corrective action usually is not taken because it is difficult to determine, through the information system, where the problem exists.

A more detailed description of these quadrants can be found in my book, The Value Creation Bible for the Mid-Market.

This completes the series related to the Ten Steps.


You now know the secret of staying healthy and Avoiding Bankruptcy. I suggest you re-read them at least once a quarter. It is all too easy to get caught up in the moment and fail to see the forest from the trees.

Optimism is the essential trait of leaders. False optimism, which is a form of denial, is a primary cause of failure. It is the "pathfinder" who knows the difference. Blame the economy, the government if it satisfies you, but the true leader uncovers the opportunity that is created by uncertainty. Perceived with a creative perspective, uncertainty can be the catalyst for a new beginning. The capitalist system will always have its ups and downs don't fight it thrive on it instead.

Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.