Restructuring your business and making it resilient
Today’s rapidly changing environment can test the limits of any organisation or business. A step in a wrong and unintended direction can sometimes have significant effects on your business’s performance and value.
Restructuring happens in most businesses at some point in time and can be triggered by factors such as a decrease in consumer demand or an increase in competition, as well as higher production costs. Your business may be underperforming and you need guidance on how to restore your business’s value and enhance financial operational performance for the long term. Even if your business does not need to restructure right now, it is still valuable to understand the triggers and processes of restructuring and its benefits.
Restructuring are measures aimed at restructuring the debtor's business that include changing the composition, conditions or structure of a debtor's assets and liabilities or any other part of the debtor's capital structure, such as sales of assets or parts of the business and, where so provided under local law, the sale of the business as a going concern, as well as any necessary operational changes, or a combination of those elements.
Restructuring will often focus on the performance of the business, its suppliers and its lenders, with the goal of evaluating and implementing opportunities to restore stability and confidence, unlocking and creating lasting value and improving operational and financial performance for the benefit of all stakeholders.
• As an initial step relating to restructuring you can start with self assessment based on the following questions:
— How can I deliver efficiency and profitability to the bottom line?
— What are the benefits and risks of going through insolvency or bankruptcy procedures?
— How can I mitigate risks that threaten productivity?
— How can I improve operations and achieve measurable results?
Why might I need to restructure?
You may find you and your business are under more pressure than ever to demonstrate to shareholders and stakeholders that your business is strong. That means looking across your business, and outside it, at where you can add value – and that could mean restructuring, separation, or mergers and acquisitions.
The environment in which your business is operating has never been more complex. If you are looking to expand into new markets out of your country or region, which territories are now the best bet? What regulations must you contend with, at home and abroad? What will keep you competitive as sectors converge and as digital innovation and the evolving regulatory agenda become ever more important?
To overcome operational or financial challenges and improve performance, you will probably need to quickly stabilise your cash and liquidity positions and take a realistic view of your current options.
General financial challenges
Businesses often face financial challenges that result in a need for restructuring.
Receiving pressure from lenders or funders can be an extremely challenging time for any business. Often, lenders are the primary source of day-to-day funding for businesses, and if this funding is no longer available, the consequences can be disastrous. Options that you may consider in such circumstances are access to new funds or reaching an agreement with your existing lender.
No business can survive without readily available cash to meet ongoing liabilities such as payroll, suppliers and lending commitments. Even profitable businesses need to manage their cash flow, and there is always room for improvement.
Business growth and efficiency
As your business grows, the business structure or related roles, skills and processes you have been using may no longer be efficient and you may need to restructure.
New legislation may come into force, sometimes generally related to business structures, but more often legal frameworks defining specific types of business or industries. This means you may subsequently be forced to review your processes or introduce new ones which need to be adopted quickly to fit in with your existing business structure. In some cases changes required to ensure continued legal compliance may trigger additional financial obligations, including tax, which can affect the profitability and thus the sustainability of your business.
Part of your business is not profitable
If one part of your business is not performing successfully, you may consider redirecting your resources and efforts to other more profitable areas. This type of reorganisation will help you concentrate on key products or services. For example, a business that sells products both online and in physical stores should dedicate more efforts and resources to whichever of the sales channels is more profitable, whether this is through generating a significantly higher number of sales or because of lower operating costs.
Loss of key supplier
Suppliers may be critical to your business, and if they are placing pressure on you it can be a very challenging time. If they are considering reducing your credit terms or if the relationship has broken down, you may find yourself in a position to consider restructuring. If your business is not able to meet the invoices’ shortened credit terms, such as days payables reduced from 90 to 30 days, the suppliers may threaten to cut off the credit line and this may lead you to adjust your finances or explore operational restructuring options.
Also, if your business operates in an industry or market with a limited number of suppliers, the loss of a key supplier may be fatal for your business. In such situations, if one critical supplier goes out of business, you may yourself get into financial difficulties and need to undergo operational improvement or restructuring. For example, a shortage of materials can trigger the need for changes in processes or product redesign, which then lead to changes in organisational structure and business operations.
Problems in your supply chain may have a negative impact on your liquidity if not handled correctly.
Economic (or other) shocks
Businesses may be significantly impacted by economic and financial downturn or other types of shocks that restrict their operations. These situations require prompt and adequate measures (or an emergency response) to ensure long-term sustainability.