Under the bankruptcy laws passed in 1999, debtors with accumulated obligations of 10 million Baht or more can seek protection from creditors if they have a viable plan for their business to recover and pay their debts. The purpose of this article is not to re-state the law, but to discuss the key issue of what is a “viable plan”.
First, let's make sure we are thinking the same way. When does a business run the risk of going into bankruptcy? When they have a loss? No, not necessarily! It's when they can't pay their bills. In other words, everything depends on cash flow, positive or negative. So, the first thing to think about is to measure the business in terms of cash flow, not profit or loss. A viable plan must be able to generate positive cash flow for the business to pay its creditors.
To understand the possibility to find a way to generate positive cash flow, you must understand the “economics” of the cash flows of your existing business. The first thing about economics is to understand it is only concerned with the future. Cash you have spent in the past is gone, even if the benefit from that spending continues into the future. For example, you may have purchased land, a building, equipment for manufacturing and office work, raw materials for inventory, etc., but these assets do not have to be purchased again in the future. So, they do not affect cash flow in the future. The key point here is these assets may have a future accounting cost that would be a normal cost of doing business under the profit and loss concept, but for “viable plan” purposes for paying back debt, they are free.
The second thing to understand about economics is the future is uncertain. What ever we plan, the real world will be different. How important is the difference to our plan? To answer that question, we need to be able to think about our future cash outflows and how they can change. Do we have future payments that tend to be fixed, like rent, office workers, etc, regardless of how many units of product we sell. Or, do the amount of payments vary directly and in proportion to the volume of product we sell (produce).
I am sure you financial whiz kids can see where we are headed. A “viable plan” in today's economic circumstances must be able to show a prospect for positive cash flow in a variety of circumstances from best case to worst case expectations for sales volumes. In other words, the break-even economics have to work. You have to be able to reduce fixed cash outflows and improve the contribution margin on each unit sold or show the benefit of price reductions driving sales volume well beyond the cash flow break-even point. As a consequence, the likelihood of success and generating enough cash to pay back creditors in a reasonable period of time is convincing. If such is the case, you should have a “viable plan”.
