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What is Financial Restructuring?
What’s important to know about it?
In this article, I will break down the meaning of Financial Restructuring so you know all there is to know about it!
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Table of Contents
What Is Financial Restructuring
Financial restructuring refers to a substantial change to a company’s financial structure, ownership control, or business portfolio intended to create additional value for the organization.
In other words, the company makes changes to its financial assets in such a way that it can increase profits, reduce costs, or mitigate risk.
For example, a company that has excessive debt on its balance sheet may want to perform a financial restructuring so that it can reduce its debt burden.
The main objective of financial restructuring is to ensure that the company is able to leverage its financial assets in the most optimal way allowing it to remain profitable over time.
Companies should regularly assess their financial position to ensure they are prepared to face changes in market demand, economic landscape, and competitive landscape.
For instance, if there is a sudden economic dip, a company’s cash flow may be adversely impacted resulting in sudden financial distress.
If the company is not prepared to deal with rapid changes to many external factors, it will struggle to keep the business operating profitably.
Keep reading as I will further break down the meaning of financial restructuring and tell you why it’s important.
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Why Is Financial Restructuring Important
Financial restructuring is crucial for companies to remain profitable in the long run.
Companies evolve in rapidly changing markets and there are many external forces that can impact a company’s financial position.
As we have seen with the COVID-19 pandemic, the market can suddenly change forcing companies to adapt to such changes.
Financial restructuring allows companies to remain profitable or deal with financial challenges.
Every company will need to have some sort of financial restructuring in its lifecycle no matter whether they are profitable or not.
Profitable companies may consider financial restructuring to optimize their capital structure, make better use of their financial assets, cut costs, or increase profits.
Companies having financial difficulties will need to engage in financial restructuring to eliminate the root cause of their challenges and get the company back on track.
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When Do Companies Financially Restructure
Financial restructuring is generally done by a company to either make better use of its financial assets or resolve financial difficulties.
In most cases, companies will engage in financial restructuring when they are financially distressed.
For example, a company starts losing money following a drop in sales and it is concerned that it will not have enough liquidity to service its debt.
To avoid defaulting on its debt, the company may want to financially restructure itself and avoid adverse consequences.
A company may want to restructure financially following a mergers and acquisitions transaction.
Typically, the acquiring firm or merged entities will evaluate one another’s financial structure and make the necessary changes to optimize the use of their financial assets.
For example, if the target company has a lot of cash on hand, the acquirer may want to use that to pay off some debt.
Healthy companies will also engage in financial restructuring when the management team considers that there are opportunities to cut costs, make better use of its financial resources, or reduce risk.
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How To Financially Restructure A Company
There are several ways that companies can engage in financial restructuring.
Remember, the main objective of financial restructuring is to increase net profits, reduce costs, and mitigate risk.
The first approach is to financially restructure your debt obligations.
This means that you will assess your company’s overall debt obligations, renegotiate terms with your creditors, pay off certain debt, make changes to your payment schedule, convert debt to equity, or find other means to deal with your debt obligations.
Another method is to restructure your equity.
For example, you can raise capital by selling equity securities, you can sell assets to bring in some cash, write down assets as expenses to reduce your tax obligations, buy back shares, or make other changes to your company equity.
A third approach is to make changes to your company’s operations.
The main objective of making operational changes is to become more efficient, eliminate redundant positions, increase productivity, eliminate waste, and generally cut costs.
Keep in mind that you can make financial restructuring by combining any of the above three methods depending on the extensiveness of your restructuring project.
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Signs You Need Financial Restructuring
Companies should carefully monitor their cash flow and financial position to ensure they are able to meet their day-to-day financial needs and have access to the necessary capital to scale.
This is particularly true for financially healthy companies who may fail to see the signs that trouble is looming.
There are certain signs that companies should watch out for that can suggest financial trouble, thus the need to restructure financially.
Here are some of the main signs of financial challenges:
- Your working capital is depleting quickly
- You are tapping into your line of credit more often
- You have to delay paying certain invoices
- You have a drop in your sales
- You are not profitable for a period of time
- You cannot get more credit from your bank
- Your employees have low morale
- You can’t close a deal due to financial challenges
- Your credit rating has dropped
- You have many customers that can’t pay their invoices
- You are in breach of loan covenants
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So there you have it folks!
What does financial restructuring mean?
In a nutshell, financial restructuring refers to the process of making substantial changes to a company’s financial assets and structure to reduce costs, increase profits, and mitigate risk.
There are many reasons why companies may engage in financial restructuring, either to deal with financial distress, following an M&A transaction or to increase overall profitability.
Financial restructuring helps a company remain financially and operationally stable, deal with changes in market conditions, and have a contingency plan in case something unexpected happens.
Now that you know what financial restructuring is all about and how it works, good luck with your research!
I hope you enjoyed this article on Financial Restructuring! Be sure to check out more articles on my blog. Enjoy!
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