The balance sheet of the company is the mirror of its financial structure. The debt and equity mix defines the net worth of the company. A negative or declining net worth indicates sub-optimal utilization of company’s assets which can lead to a financial distress situation. This situation can lead to severe liquidity problems and cash-flow pressure. It can be an outcome of business environmental factors such as pandemic, epidemic or an economic slump in which case the government steps forward and offers multiple financial aids to recover. If this situation is individualistic and not due to sensitivity of economic cycle, then one is forced to resort to turnaround and financial restructuring measures!
Is it easy to undergo a financial restructuring? A straight answer to it is ‘No’ but it becomes need of an hour in business downturn events. So, what should a company do before considering turnaround and restructuring advisory? Are there any primers or indicators which can help in reviving the profitability? If you are seeking answers to these questions then here is what we have got for you.
- Evaluate the financial leverage: The leverage ratios are directly related to risk borne by shareholders. Higher leverage ratios indicate higher risk to shareholders. Debt/Equity ratio compares amount of long-term liabilities in balance sheet against the shareholder funds. In the early stages of downturn, most companies utilize the credit limits to the maximum to meet their cash flow needs. This put lot of pressure on the earning capacity of the business as there is excessive use of debt and this ratio starts to surge which serves as an early red signal! This is a trigger point for a company to decide and opt for financial advisory restructuring services.
- Restructure the existing contracts to decrease costs & increase revenue: Every business has multiple contractual arrangements relating to operations and finances. A successful renegotiation of these contracts can help in cutting down of costs (strive for lowest interest rates, higher credit period) and increasing revenue (consider rate revision for short-term with clients, apply for fiscal subsidies & incentives).
- Consider infusion of new capital into business: If this situation is consequent to expansion strategy of business and company is expected to be solvent then in interest of shareholders, board of directors can permit infusion of fresh funds into the company.
- War on Waste (WoW): Every company should apply procedures to control the material cost leakages. If there is any asset which is inessential to company’s operations, then it should be discarded. The proceeds should contribute in improving liquidity position of the company. Selling an asset and leasing it back at lower rentals can be one strategy for essential assets.
- Exchange of debt-for-debt: The debt holders agree to discount existing debt and interest, thus offering lower principal, interest rate and longer maturity. Market players offering financial advisory restructuring services can assist in negotiating these terms if the network of debtors is huge.
It is important for a company to reorganize the capital for optimal utilization of resources and wiping out accumulated losses as a primer to turnaround and restructuring advisory services. Contact us for more information!