For an organization to grow, many factors have to fall into place and stay consistent. At any moment, there could be a shift that affects the profitability of your original business model. From market fluctuations and technological disruptions to changing customer needs, these ebbs and flows can create quite the volatile mix.

Even if your company initially thrives in these situations, it will inevitably face dire circumstances, some of which could lead it into a financial crisis. This is when companies begin to consider embarking on a financial restructuring process.

Read on to learn how this process works and learn five tips for ensuring it delivers the results you need.

What is Financial Restructuring?

In short, financial restructuring is the process of fundamentally changing your company’s financial and operational approach to save it from a pattern of loss. It is usually required when your business is facing extreme monetary pressures (such as crushing debt or sky-high operating costs), and you cannot continue following the same models as before.

Most of the time, the restructuring process involves cutting costs or selling assets to accommodate cash flow management and alleviate the debt load.

It ain’t over till it’s over.

There’s still hope. We’ll salvage the financial wreckage by optimizing capital and cash flow. 

5 Tips to Optimize the Financial Restructuring Process

Whether COVID-19 has negatively impacted your business or not, there are many reasons why you might be considering financial restructuring. Let’s take a look at five tips that will help the process go as smoothly and successfully as possible.

1. Assess the Situation

If you’re facing a major financial crisis, you might be tempted to shake everything up right away. However, it’s important to proceed clearly and cautiously. 

Before you overhaul your entire business model and revamp your organizational systems, it’s important to engage a business transformation consultant to guide you through the restructuring process. This expert can help assess your situation from an unbiased standpoint and propose solutions.

2. Redefine Your Goals

Holding tight to obsolete initiatives is a recipe for continued disaster. A willingness to embrace growth is critical. 

When you first started out, your idea of success might have been copious amounts of income. Now, you’re just struggling to keep the doors open. As you enter into the financial restructuring process, be willing to be flexible. The enterprise strategy you once had for your organization must shift, along with your expectations.

Many companies don’t have existing strongholds in place to prepare them for an economic downturn or severe fluctuations in their niche market. Thus, new tools, resources and measures must be leveraged to emerge from this crisis. These might include:

  • Downsizing your company
  • Reorganizing your departments 
  • Changing your management structure  

There will be myriad stakeholders, including your executive leadership, employees and investors, who require an accurate and honest answer about the future. It’s important to keep communication open and consistent and ensure everyone understands the measures to be taken.

financial restructuring definition

3. Make Operational Improvements

You should try to gain a clear understanding of the issues that led you into this financial crisis. Most of the time, a lack of cash stores isn’t the root issue, because the situation goes deeper than dollar signs. Also, you cannot place all the blame on supply chain disruption.

While capital raising can help alleviate the problem, operational issues are often at the core of cash flow deterioration. An outside consultant can help your company identify operational issues and leverage your limited resources to create the value.

Operational improvements can include making adjustments to your vendor and supplier relationships or improving key business processes.

When determining how to rebalance your debt load, we recommend taking a close look at each of your vendors. Rather than lumping them all into one group, classify them based on their connection to your company’s long-term stability. Doing so helps make sure you’re using your now-limited cash stores as wisely as possible.  

The suppliers to contact first include those who:

  • Are essential to your future operations
  • Are owed money that’s already long past due

When contacting vendors, be transparent about your situation and let them know you’re entering into a financial restructuring. If you offer payment commitments, keep them practical. The key to maintaining their trust and keeping their partnership is to never over-promise and under-deliver. 

4. Increase Net Asset Turnover

Analyze your assets with a fine-toothed comb. Perform a comprehensive collateral assessment, separating those assets that fit any of these descriptions:

  • Might be useful down the road, but aren’t being currently used
  • Valuable, but not frequently used
  • Valuable, but can be outsourced elsewhere
  • Inventory with a low turnover rate

Can you turn any of the above non-operating assets into substantial cash for your company? If so, selling them can help alleviate your financial burden.

However, there are times when this isn’t enough. You might also need to sell operating assets or divisions as part of your financial restructuring process.

To determine where to focus your efforts, first assess the cash returns that each business, product line or department earns. Then, compare that amount to the value of that segment. 

If you identify any segments with capital costs that exceed their earning potential, selling those might be the only viable way forward. Your transformation consultant can assist with the valuation required at this juncture.

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5. Undergo Debt and Capital Restructuring

When debt is overwhelming, it’s tempting to consult with lenders who make grand promises about rich money stores you can access with just a few clicks. Yet, it’s critical to be wary of these gimmicks.

Today’s capital market is no longer as replete with liquidity as it once was, and most of these “lenders” are only interested in the exorbitant fees they can charge. In almost every case, their contracts will come with stringent requirements and impossible payment terms that put you even deeper in the red.

For that reason, it’s often preferable to pursue debt restructuring by renegotiating with your existing secured lenders. During lender negotiations, be clear on what you need (e.g., release of cash collateral, a longer repayment timeline, etc.). You should also explain how the adjustment will improve the lender’s situation.

If bankruptcy looms or you’re considering bankruptcy management solutions, a debt-for-equity swap might be realistic. Again, you’ll have to show the lender how that transaction will more greatly benefit them than the outcome of a bankruptcy filing. 

Financial Restructuring Support, One Step at a Time

No company opens its doors expecting to undergo the financial restructuring process. Yet, it’s not as uncommon as you might think. The key to emerging stronger and more profitable than before is taking the approach one step at a time.

By bringing in the right people and having the right conversations, you might find that the answers to your debt woes and cash drought are closer than you think. Request a free consultation below to learn about our financial restructuring services and bankruptcy management solutions.

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