A Director’s Guide to Navigating Financial Distress
As a director, you face difficult decisions when your company experiences financial distress. It may be necessary to consider corporate restructuring strategies, which is a complex process. Here, we explain corporate restructuring strategies that may help save your company.
When to Consider Business Restructuring
There are several reasons why commercial restructuring might be necessary, including if the company:
- Needs to generate more revenue to cover its costs. Cash flow issues often indicate that a business must take action or risk becoming insolvent.
- Has high levels of debt. Again, the debt should be covered by revenue. Low income and high outgoings are red flags for financial difficulties ahead.
- Is not competitive in the market. Your market base has shifted, or your competitors have introduced new services or products, resulting in a decrease in your company’s sales.
- Is not meeting its obligations to creditors or shareholders
If you’re facing any of these issues, consider commercial restructuring strategies. Questions you should ask at this stage include:
- Can the business be saved?
- Do I want to expend the effort and funds required to save it?
- Can the business remain competitive and profitable?
If you believe the answer is yes, then this is a viable route to take to get your company back on track. As the cost savings and competitive advantage you may be able to gain back can pay dividends in the long-term.
Key Types of Restructuring and Turnaround Strategy
Below are the most common tactics for a company facing financial distress:
- Financial support
- Operational
- Organisational
- Portfolio
- Legal
- Overhead
- Turnaround
- Acquisitions and mergers
- Debt
There are many steps in an overall company restructuring plan. To help you understand what may be ahead for your company, consider the methods below.
1. Assess Your Financial Position
The first step in a commercial restructuring is to assess the company’s current position. This involves reviewing the company’s financial statements and organisation and processes to identify its strengths and weaknesses. This information serves as a starting point from which we can develop a restructuring plan to address the company’s financial challenges.
2. Identify the Cause of the Financial Difficulties
The second step is to identify the causes of the company’s difficulties. This involves analysing the company’s finances, organisation and performance and determining what led to its current situation.
This causal analysis enables your financial team to identify and resolve problems as part of the restructuring plan. For example, if the company is not generating enough revenue, measures can be implemented to increase sales. Areas of the company not performing as well as expected may be sold to provide funds.
3. Develop a Turnaround Plan
After the financial position is assessed and the causes of its economic difficulties are identified, it’s time to develop a restructuring plan. The purpose of this document is to outline your company’s restructuring plan and intended path back to regular trading.
The plan should be realistic and achievable, taking into account the company’s current situation and its prospects.
4. Negotiate with Creditors and Shareholders
The restructuring plan must be presented to creditors and shareholders for approval. This process may present a more favourable option than liquidation, offering creditors and shareholders a lesser chance of losing their money.
Everyone involved in a commercial restructuring should be working towards achieving the same goal, turning around the company’s fortunes.
5. Implement the Turnaround Plan
When company stakeholders have agreed to the restructuring plan, it is time to implement it. This involves implementing all the measures outlined in the plan. Your financial advisor will work with you, especially if there are any changes required to how the business is run.
The plan may involve changes to business processes. As such, personnel, training, or guidance may be required for the remaining staff members.
6. Monitor the Progress of the Turnaround Plan
Finally, once the restructuring plan has been implemented, progress will be monitored.
The turnaround plan includes management accounts and reports and regular reviews and comparisons with expectations will help keep the business running successfully.
The Different Business Restructuring Options Available
There are several options available to directors who may be reluctant to restructure their company.
Selling the Company
This may be a suitable option if your company is experiencing financial difficulties and you have no intention of continuing in business.
The advantage of this option is that it may provide a quick solution to your company’s problems. However, the disadvantage is that the company stakeholders may receive less money than it’s worth.
Closing the Company Down – Liquidation
Closing the company is used when there’s no hope of turning its fortunes around. This process is called business liquidation and will ensure the directors are not guilty of illegal trading while insolvent, but it may mean creditors, including employees, will not receive all, or any, of their outstanding debt.
Negotiating Debt or Refinancing
This option may help return the company to regular trading. It involves renegotiating the terms of the company’s debt with its creditors. Your financial advisor may be able to obtain funding.
Voluntary Administration
This outcome hands control of the company to an experienced, licensed administrator. The administrator aims to recover the company to achieve the best financial outcome for the company’s creditors. They will also investigate the causes of the company’s financial difficulties.
How Restructuring Can Prevent Insolvency
Choosing to restructure your business can address underlying issues that contribute to your financial distress. It can prevent the threat of insolvency by streamlining your daily operations and improving your business health. As a strategy, it can help you to:
- Improve cash flow
- Reduce debt
- Reduce business expenses
- Strengthen your balance sheets
- Reorganise agreements and contracts
- Turnaround management problems
- Introduce measures to actively block insolvency (for example, applying for voluntary arrangements)
- Improving creditor and stakeholder confidence
The goal is to avoid bankruptcy, preserve value, and set the business on a path toward recovery and growth. With a timely restructuring, your company may be able to do just that.
What Happens After a Business Restructure is Complete?
This depends on your specific restructuring plan and the agreed course of action. After the process ends, you may have to sell some or all of the company’s assets and the proceeds from the sale will be used to repay the creditors.
The turnaround strategy may have required some employees to face redundancy, while others were reassigned to new roles. Ongoing financial monitoring will be crucial and, by using a consultant, you can gain support in the aftermath of a restructuring. For example, at Corporate Lifeline our business restructuring advice team will remain with you to monitor and review management and financial reports to ensure the business performs as planned.
Get Restructuring Support for Your Business Today
At Corporate Lifeline, we’ve helped hundreds of businesses overcome financial distress. A business restructuring may be the path back to regular trading for you. Contact us today for a judgment-free assessment and expert advice on your next steps.
