When might I need to restructure?
Many businesses recognise the need to restructure too late, when the range of options has narrowed and saving the business may be more difficult. The question, then, is: when is the right time to initiate a restructuring?
The first indicators may include:
• profit warnings
• downgrading of credit status
• underperformance of share price compared with relevant industry benchmarks
• poor financial ratios, particularly gearing ratio (debt-to-equity ratio), return on assets or investment, or operating margins, when compared with industry benchmarks
• failed fundraising or refinancing
• a new management team
• off-plan performance
• aborted or failed projects or disposals
• prospective covenant breaches.
These indicators often constitute a framework known as an early warning system (EWS), which is a set of relevant indicators (often financial) which signal potential looming risks in your business’s performance.
Early warning system
Once your business establishes regular financial planning and reporting, business strategy preparation, operational performance review and analysis, it is recommended that you keep these processes regular and integrate them into an early warning system (EWS). By implementing an EWS, you will have the chance to take advantage of opportunities to avoid or mitigate potential problems. The EWS is typically envisaged as a signal or red flag system, in which you are monitoring whether a selected number of indicators are within an acceptable range or level. If any indicators or signals are out of the acceptable and desired range or level, you should take a closer look at the business performance to evaluate the source of the deviation.
An EWS is in practice an internal risk management system that may reflect your business’s legal, regulatory and business environment.
• External risk management focuses on external business analysis. This includes:
— the domestic or country-specific macroeconomic, political, legal and other environments
— the international context, such as markets where the key buyers or suppliers operate, or key commodity prices across global markets.
Businesses should individually define their own early warning indicators or KPIs based on their industries and then establish their own early warning system. You can use your financial ratios to help you spot potential financial difficulties. For example, a quick solvency assessment, as part of the EWS, may contain liquidity and solvency indicators, such as current quick and debt to equity ratios.
Accurate, timely monitoring of results against a set of SMART objectives, milestones or having clear separation of roles and responsibilities in the process can sharpen the delivery of results, highlight poor execution and normally heighten peer group pressure and team spirit. There are a number of techniques you can use when performing restructuring in order to ensure its success.