Are you struggling with your cash flow? Has your bank refused to lend you any more money? Are your partners or shareholders no longer willing to infuse fresh capital into your business? Have your vendors stopped extending you credit? Your answers to these questions will help you determine if your company is headed for bankruptcy.

There is yet no bankruptcy law in the Philippines, so the practice is for losing companies to request the court to order a suspension of debt payments. Normally, the court is the one that decides – based on the recommendation of a third party receiver – whether a company should be liquidated or rehabilitated. Rehabilitation requires the company to re-organize itself to improve its operations and increase its cash flow. It is normally the option most companies – unless opposed by their creditors – opt for.


The Altman Z Test accurately measures the probability of a company going bankrupt. Developed in 1968 by Edward I. Altman, the test uses five financial ratios that are weighted and added to arrive at an overall score. These ratios are working capital to total assets, retained earnings to total assets, earnings before interest and taxes (EBIT) to total assets, market value equity to book value of total debt, and sales to total assets.

Altman Predictor Model Weighting

A    EBIT/Total Assets    3.3
B    Net Sales/Total Assets    0.999
   Market Value of Equity/Total Assets    0.6
D    Working Capital/Total Assets    1.2  
  Retained Earnings/Total Assets    1.4

                         Z-Score = (A x 3.3) +(B x 0.999) + (C x 0.6) + (D x 1.2) + (E x 1.4) 

This is how you determine your financial standing:

•    A Z-Score of 2.99 and higher means your company is safe.

•    A Z-Score between 2.7 and 2.99 means you should watch out as your finances could get worse.

•    A Z-Score between 1.8 and 2.7 means your company may go bankrupt in two years if you don’t do anything to improve your situation.

•    A Z-Score of less than 1.8 means you’re on the brink of financial collapse.

Unfortunately, many small businesses do not bother finding out their Z-Scores because they don’t have reliable financial data to start with. Most do not have audited financial statements but rely on bank transaction records to keep track of their cash flow.

Regularly computing one’s Z-Score is a good practice for an entrepreneur to cultivate, because it would give him a heads-up long before radical action is required to turn the company around.

If you feel that your company is headed towards bankruptcy, create a short-term cash flow cycle and then hire third party consultants, preferably Certified Financial Consultants (CFC), to help you fix your problems. They may be the only ones who could evaluate your situation objectively and find a way to forestall your financial collapse.


A business on the cusp of insolvency can still recover. Here are some tips to keep your troubled company afloat:

1. Control your cash expenses.

Watch your checkbook usage like a hawk, and be the one to approve every expense item. Always look for ways your expenses can be delayed, minimized, or saved through exchange deals with suppliers.

2. Cut operating expenses.

Adopt cost-cutting measures. Maintain only a lean staff but don’t downsize your manpower to the point it would hurt your operations. Cut down on perks.

3. Negotiate a deal with debtors.

Be upfront with your suppliers by telling them your financial situation, and convince them to agree to restructure your loans so you can settle your obligations over time without them cutting your inventory supply right away. Also, remind them of your long-standing business relationship when talking them into not charging too high an interest for inventory that you are buying on credit. Tell them their understanding is important in helping your business recover.

4. Budget your cash flow.

Determine how much cash will be needed to cover your fixed and variable expenses. See how you can collect cash on time by aging your receivables. Other sources of cash flow include selling old inventory or fixed assets, although this should be done only once.

5. Implement a short-term cash-to-cash cycle.

Find ways to shorten the time you convert your inventory into cash. Unless your supplier is willing to give you long credit terms, you would only be straining your finances further if you hold inventory too long. Better yet, sell your products on cash basis and avoid giving your customers long credit terms. You must always strike a balance between inventory and sales to keep your finances on an even keel.

Tips to implementing an effective recovery plan:

1. Develop a business plan and meet your stakeholders.

Your banker, stockholders, and partners need to know your future plans because they would surely want to help you survive your company’s financial challenges.

2. Meet with employees.

Sit down with your employees to tell them something went wrong with the business. Discuss how you intend to fix it.

3. Meet with customers.

Inform them of your real situation and let them know how you’re handling it. This will reassure your customers who would probably have heard rumors about your financial trouble from the business community.

4. Meet with suppliers.

Respond quickly to your suppliers’ concerns regarding your financial situation. Avoiding their calls will only worry them, and may start them thinking twice about extending you any more credit.

5. Meet with your bank.

Arrange a meeting with your bank manager and tell him the bad news. It should be followed by a plan on how you intend to pay your existing loan.

6. Lay off non-essential employees.

Keep the staff critical to your business, such as those in sales and marketing, and let go of those performing duplicating functions.

7.    Save, save, save.

Look at your company expenses and stop making unnecessary purchases.



Henry Ong is an entrepreneur, investor, researcher and business columnist for more than 20 years. He holds double degree in accountancy and applied economics, a Registered Financial Planner (RFP) and Certified Management Consultant (CMC). Follow him on twitter @henryong888