Business Case #4: Financial Crisis

You are the chief financial officer of a 25-year-old manufacturing company that employs 75 people.  The company has been losing money for four years and its family owners have poured over $1 million dollars into it to save it.  In addition, the company has a $750,000 line of credit.  The bank has become increasingly nervous about the loan, especially since the principal owners of the business have already cashed in or borrowed on most of their collateral to reinvest in the company.  The company has been fully drawn on the line of credit for over a year and has been late on the interest payments.  You are friendly with Mary, the loan officer in charge of the account.  Mary has warned you that the bank will have to call the loan and cancel the line unless the company shows a profit this year.

Martha, the owner (her husband died five years ago, leaving the business to her and their two children, Dave and Sue), is angry and resentful. She has put everything she has into the company, financially and emotionally, to save jobs and keep the business alive.  She and her children believe they have “turned the corner,” reducing losses of $500,000 three years ago to under $100,000 last year.  She is especially bitter that the bank has demanded personal signatures on the loan of the entire family and a second mortgage on her house.  And she was furious when Mary insisted on raising the interest rate on the loan to 35 percent over prime.  Mary said that her “neck is on the line” since her loan committee has wanted to call the loan for the last two years, but she convinced them that the business would turn a profit again.

In order to create a profit, family members cut their own salaries by 50 percent and put off needed repairs of equipment.  It looked as if the company would show a small profit.  Unfortunately, toward the end of the year, a large order was canceled, destroying any chance of a profitable year.

Martha comes to you begging you to find some way to show a profit.  If you could “lose” some invoices you could reduce accounts payable and you could overstate accounts receivable by not entering the cancellation until next year.  If you do not do something to show a profit, you are convinced that the bank will call the loan, and the company will not survive.

  1. What do you do?
  2. Who are the stakeholders, and what ethical principles are involved?