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5 Signs It’s Time to Restructure Your Company 

signs it's time to restructure your companyOver the course of my 28+ years of financial experience, I’ve had a number of restructuring transactions. What I have found is that many companies do not know when it’s time to restructure their company. Instead, they wait until it’s too late and it becomes a liquidation event.  Restructuring can mean different things, there are restructuring engagements that take place through the legal system such as bankruptcy, and there are out-of-court restructuring.  In this blog when I mention “restructuring,” I am referring to out-of-court restructuring. In this week’s blog, we’re looking at the 5 signs it’s time to restructure your company.

What is Restructuring?

Restructuring is when you change internal operations processes, positioning in the marketplace, restructure debt, modify your operations and work towards becoming a more profitable and cash flow positive business. There are several reasons why companies undergo restructuring.  Usually, they are feeling a financial pinch. Most business leaders actually wait to long to restructure their business. In 2014 with the fall in oil prices, I actually saw companies with direct impact wait to make any changes. Those that saw the writing on the wall and took aggressive action early on are the ones that survived. Whenever you see external or internal factors affecting your cash flow and financial performance, you need to take a hard look at them and do not wait to make changes.

Several of the signs its time to restructure are also destroyers of value. If you are crafting your exit strategy now, then download our Top 10 Destroyers of Value to make sure you don’t leave any money on the table.

Signs It’s Time to Restructure Your Company

Now, you know what restructuring is. The next question is… When? There are several signs it’s time to restructure your company, but we’re going to look at the top 5 indicators that things need to change.

signs it's time to restructure your company

1. Trends Are Not Looking Good

Hopefully you have dashboards in place and financial reports that allow you to track trends such as your trailing twelve months margins, ratios and a 13 week cash flow forecast in addition to an annual budget. If these tools are painting a picture that your business is not performing, then corrective action should take place sooner than later.  If after your corrective actions, the trends are still negative, then you may consider a broader restructuring of your business.

2. Over-Leveraged

For the past 10 years, the cost of money has been cheap. Banks, asset-based lenders, and investors are all looking to place money to work. With low interest rates and excess liquidity, companies have had access to cash in the form of debt. Debt is not all that bad if it is managed wisely and you do not exceed the amount of debt that your balance sheet can handle. The ease of acquiring debt has led to some companies having to much debt  – over-leveraged.

What is too much debt? Well it depends on your business and your balance sheet. Commercial banks have the most conservative ratios, but I would say that even some of those may lead to too much debt. If you have too much debt, then you may find yourself needing to restructure your company. If the debt is more than you can pay, then you will likely find yourself in a legal reorganization, such as court protection through a bankruptcy process.

An investor will not invest in a company that has too much debt. If you are seeking investment, financing, or want to sell, then learn about the Top 10 Destroyers of Value.

3. Changing Markets

I can think of two current markets that have changed or are changing today. If you are in these either of these markets, then you will need to consider restructuring your business. The first is the retail real estate market businesses that own malls or large shopping centers. Online sales have totally changed this market. Large department stores are disappearing as more and more retail customers are shopping online. Owners of malls in many areas are having to restructure their business and find alternate uses for the real estate. The second is the off-shore oil and gas industry. This sector has not recovered yet, and it is going to be a long haul. Boat companies, offshore suppliers, and service companies are having to come up with a new way to survive.

If you find yourself in a market that is either disappearing or dramatically shrinking, then you need to take drastic action and restructure your business. If it is a permanent change in the market, such as the market change of renting movies to Netflix, then you may find yourself in the same position as Blockbuster which just disappeared. Hopefully, the executives and your Board of Directors have a keen eye on the markets you are in and how technology is affecting them.

4. Environmental & Technology

The world has become smarter about taking care of our environment. Technology is helping us do this more and more efficiently. 20 years go, an electric car was more of a concept only and cost prohibitive from a manufacturing standpoint. Today, there are several cars in the market that are more affordable and manufacturers are bringing prices down every year and new models coming out.  The major automakers know this and are planning ahead.  For 100 years now, cars have run on on oil based products. If your business is tied to gasoline engines, hopefully you are looking to restructure your manufacturing or market. The environment can also bring major changes. Do not think of just taking care of the environment versus pollution, but bad weather can also force you to change. Sometimes, for the better. I was talking to a client recently in the mid west part of the country. They can not find contractors to fix roofs because they are all down in the Gulf Coast.  How about a new roofing business in the mid west? They continue to have the need.

signs it's time to restructure your company

5. Regulatory Environment

Government is getting bigger and bigger. Every year, there are more and more regulations changing how the business world operates. If you are in a market that has new regulations, then this may be something that will cause you to change how you operate. You may find yourself restructuring your business to either adapt to the new regulations. Or you may find your self restructuring your business to get away from the regulated environment.

Protect Your Company From Destroyers of Value

Restructuring your company protects your company from destroyers of value; however, you should always be looking at how to improve the value of your company. Locate other areas that are destroying the value of your company with our free Top 10 Destroyers of Value whitepaper.

signs it's time to restructure your company

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Recession = Fewer Professional Jobs Available

If you haven’t been living under a rock for the past 15 months, then you have probably noticed that the decline in oil prices has resulted in many Houston businesses experiencing symptoms of an economic recession. What does a recession mean for you? Historically, recessions equate to reduced availability of professional jobs.

less professional jobsWhile the effects of the free fall in oil prices may have not spilled over to your economic sector yet, banks are already restructuring the troubled loans of oil and gas companies. This could result in more layoffs in the energy sector. In addition, it will likely impact other industries as well.

But even greater than the oil and gas industry, we’re seeing international economic upsets in China, Latin America, and in other areas of the American market economy. Some are expecting to see in 2016 a recession greater than that of the 2008 recession.

How Most Companies React to Recessions

Most companies without effective leadership would begin to cut the upper management who complete the 20% of the work. This leaves the lower level employees that complete 80% of the work. Many of our clients lay off the CFO and other “non-essential” leaders within the company. Why pay $50,000-$100,000 more for an employee when they only complete 20% of the work needed? Fewer professional less professional jobsjobs are thus becoming available because those positions are now deemed obsolete or as overhead.

Companies are removing experienced professionals from their positions due to their higher cost. Therefore, we tend to see many “battlefield promotions”. The military coined this term as a promoted soldier due to the death or injury of a senior officer.

Like in the military, employees are often promoted during a recession not necessarily because of their skills. But because their supervisor left or was laid off. CEOs or hiring managers feel that if these employees can do 80% of what their manager did, then asking them to do the whole job isn’t too much of a stretch.  While they might have the talents to succeed, they may not have the skills needed to complete that last 20%.

One way a business can protect itself from such a situation is by making a practice of hiring star-quality team members. These members can rise to the occasion when faced with rough economic times.

NOTE: Want some guidelines to develop a star-quality team? Download the Guiding Principles for Recruiting a Star-Quality Team to make sure your team can adapt in rough economic times.

Fewer Professional Jobs Available

As difficult as it is for those receiving battlefield promotions to get up to speed quickly, the fired managers face an even tougher challenge. Suddenly, there are more qualified candidates in the marketplace than there are positions available and fewer professional jobs available. The available jobs have been filled from within through battlefield promotions.

Highly-experienced individuals found that they have to take positions they are overqualified for at reduced pay.  This is where the value of the network you have built (or will wish you had built) really pays off.  Your connections in the marketplace can mean the difference between securing a desirable position, or settling for what you can find.

When looking for a job with limited openings in the marketplace, find an organization where you fit and can provide value.  Even if that means taking a pay cut, the money should come when things turn around.

Hiring & Restructuring Human Capital

Regardless of how this emerging recession is impacting your organization, realize that the #2 reason why businesses fail is employee turnover. Think about it. The costs associated with replacing an employee include: hiring, interviewing, on-boarding, training, mentoring, and waiting approximately 6 months before they find themselves accustomed and productive in your organization. The hiring process is getting longer and thus, more expensive.

As you’re building a new team or assessing your current employees for possible battlefield promotions, consider how you can build a star-quality team. A star-quality team will carry your company through tough times. Assess your current employees as if you were hiring them for the first time. If a battlefield promotion is necessary, who will rise to the occasion and provide the most value to your company?

In tough times, companies generally try to run leaner.  There are ways to do more with less and to measure the productivity of those limited resources. If you’ve exhausted all resources within your organization, then look at how to hire the right people to build your team.

Check out the guidelines that The Strategic CFO uses as we advise our Retained Search clients to help find the perfect fit. Click here for your FREE download of those guidelines.

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Banks are Restructuring Troubled Loans

With oil prices the lowest they’ve ever been in recent memory, business owners and financial analysts are predicting either an economic downturn, or possibly another recession in oil producing states. Bad news for oil and gas companies? Maybe not… Recently, I spoke with several Houston area bankers and learned that there seems to be a general focus on how banks are restructuring troubled loans in the oil and gas industry rather than forcing these companies into a workout situation as in previous downturns. This particularly applies to those companies who were more financially fragile going into the crisis back in July 2014.

Banks are Restructuring Troubled Loans

According to a recent Wall Street Journal article, some analysts and investors say, “The time of reckoning has been pushed back restructuringseveral months as banks prove reluctant to turn off the taps.” Despite being in the 15th month since the peak of oil prices in July 2014, banks “have kept flowing, helping the [oil and gas] industry weather the market’s collapse.”

If you’re in any oil producing state or country, you’ve probably already felt the pinch. Unfortunately for some, the price of oil is predicted to stay at $40 for the next 9-21 months, extending the “crisis” to 24-36 months.

One of the questions that we’re dealing with today is to what extent this crisis will spill over to other markets. Companies adjacent to the oil and gas industry will likely be feeling the pain in the near future. The good news is that banks aren’t pressuring companies outside of the oil and gas industry to restructure their loans just yet.

(Questions that your banker wants to know the answers to… Click here to read more about it)

What Can I Do Now?

The key is DON’T PANIC! There are steps you can take, so it’s time to put on your thinking cap and be the trusted advisor your organization needs.

(NOTE: Want more tips on how you can be a trusted advisor? Check out our whitepaper How to be a Wingman!)

Sit back and look at your company as a whole in the market. By taking a wide view, you’ll be better able to see where the company is unnecessarily bleeding.

Three things are key in protecting yourself in an unstable market:

  • Be proactive
  • Cut sooner and cut deeper
  • Restructure

Be Proactive

If your company is on the “edge” of the oil and gas industry, be proactive! Since we’re in the 15th month and are expecting it to last up to 36 months, it’s vital that you start preparing now.

First, calculate the how long your company can lose money without running out of cash. If you haven’t acted yet (especially if you’re in the 5% closest to the oil and gas industry), you’ll most likely discover that you’ll run out of cash before this crisis is projected to end.

Start analyzing how your market is functioning, how your company is operating, etc. List all of the operating functions that are not necessary or could be dramatically improved. Ask yourself: what are you spending the preciously small amount of cash that you have on?

The advantage of acting now is to prevent panic (i.e. cutting thousands of jobs, angering stock holders, breaking debt covenants, etc.). If you’re trained, armed, and ready, then you have a much better chance of surviving this crisis than a company who walks on the battlefield completely unprepared.

Cut Sooner And Cut Deeper

Oftentimes in this twilight zone of a crisis, soft cuts are ideal because they don’t hurt as much. This results in further cuts happening down the line when you find yourself scrambling to find a solution.

When we say “cut,” we don’t always mean cut people. Put on your thinking cap and re-engineer your company. Just because you’ve done things a certain way for 20 years doesn’t mean it should stay that way for the next 20. Times change and so should your company.

Years ago, I had a client who was spending upwards of a quarter of a million dollars on advertising in Yellow Pages. He found himself in a pickle despite the fact that the market was ideal for his company. Even though it hurt, he cut his marketing from $250,000 to $50,000 and allocated the $200,000 to other more vital places within the company. Because of this reallocation of resources, he was able to save his employees and the company.

There are many ways to do more with less. More money spent does not always correlate to higher productivity or efficiency.

Reallocate your resources from the old company to the new.

Restructure

There are two sides to restructuring: either the bank restructures the loan or the company restructures its operations. In simple terms, restructuring is when significant changes are made in the operations, structure, or debt of a company to avoid financial harm and improve the business. This should provide greater efficiency, if done correctly.

The strength of your operations can either cause your ship to sink, or deliver you safely to the shore. Managing your cash flow is of the utmost importance. Prioritize what is necessary to continue operations. Analyze what can be and needs to be cut. Improve productivityProject your cash flows. Manage your cash flows from there.

Debt restructuring essentially provides two options: continue operations or liquidate. If you are able to maintain and increase cash flow while reducing expenses, then continue operations. The goal is to at least break even.

Ultimately, the company needs to make a decision about when to jump ship. If after researching and analyzing operations, structure, and debt you find that you cannot make $1 profit, then the best case scenario would be to liquidate.

 (Be mindful of Expense Restructuring when restructuring your company.)

It’s not every day that you’re given the opportunity to restructure your company to have higher productivity and higher efficiency, thereby a higher net income. Be proactive, make the necessary cuts now, and live to fight another day.

(NOTE: Want more tips on how you can be a trusted advisor? Check out our whitepaper How to be a Wingman!)

HOW TO BE A WINGMAN

Reference: Wall Street Journal’s “Oil Sinks Below $40 Amid New Signs of Glut”

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Banks are Restructuring Troubled Loans

See also:

What You Should Know About Breaking Debt Covenants

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Doing More With Less – Improving Productivity

Whether in response to low oil prices or simply in an effort to run leaner, companies across the globe are cutting jobs.  Last week, Chevron announced that it plans to lay off roughly 10% of its workforce, roughly 6000 to 7000 workers, in 2016 to deal with the plunge in crude prices.  Deutsche Bank recently declared its intention to reduce headcount by 23,000, roughly a quarter of its personnel, as part of a broader restructuring plan.

Dealing with a reduction in staff, regardless of the reason, can be challenging.  The workload doesn’t change simply because there are fewer people to share it, so companies must figure out how to get the same amount of work done with fewer people.  In short, they must improve productivity.

Improving Productivity – Doing More With Less

Improving productivity begins with measuring it.  In his book The Goal, Eliyahu Goldratt defines productivity as:

Productivity = Throughput ÷ Resource

…where Throughput = “stuff we got done” (widgets produced, concrete poured, invoices written, etc.)

…and Resource = “what we did it with” (people, time, dollars)

Sounds simple enough, but determining what really drives productivity in an organization can be tricky.  For help determining what your company’s Key Performance Indicators (KPIs) are, check out our KPI Discovery Cheat Sheet here.

Now that you’ve discovered what productivity measures to track, it’s time to track them.  Including these KPIs on your weekly flash report or dashboard allows you to keep an eye on how key resources are being utilized.  And when resources (such as people) are scarce, even small gains in productivity can yield big results.

The final piece of the productivity puzzle is to tie improvement to recognition or rewards.  Employees are likely reeling from the reduction in staff.  Providing incentives for meeting productivity goals will not only help ensure that the goals are met, but can provide a much-needed boost in morale.

We’d love to know what steps your company has taken to do more with less, so leave us your thoughts in the comments section below.
Improving Productivity, doing more with less

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Cost Control vs Cost Reduction

cut costs There is a difference between cost control vs cost reduction. Most people think that controlling costs and reducing costs are one and the same when, in fact, they can generate two totally different outcomes.

The first thing you need to know is that you can’t grow a company by cost reduction alone. You can get short term gains but, eventually, they fade. When public companies reduce costs through a restructuring there is typically a  short term lift to their stock price. However, for the increased stock value to be sustainable they must grow revenue.

An example might be Barnes and Noble bookstores. No amount of cost cutting is going to change the situation that they find themselves in today. They must reinvent themselves and pivot.

So if we want to add value we must grow revenue, how do we do it? There are three ways that come to mind. We could develop new products or services, increase market share or increase selling efforts. What do all three of these strategies have in common?

You have to increase costs to increase revenue!

So instead of looking for the lowest cost in a transaction you should look, instead, for the largest value received per dollar spent. It is easy to apply this train of thought to selling costs, marketing costs or product development costs, but what about overhead?

Does hiring the candidate at the lowest salary translate into a good value proposition? Does paying a premium get you a better employee?

The answer is: “it depends”. You should evaluate each cost incurred in light of the excess value received and the goals of your company.

We knew a company who wanted to spend as little as possible on their accounting staff. So they hired the cheapest accountants they could find not the most competent. In the end, they spent more money on cleaning up the financial statements, bringing them current and completing the year-end audit than the savings recognized.

The moral of this story is that you can’t build a house with only a hammer. Consequently, you can’t grow a company profitably by just focusing on cost reduction.

Learn how to apply concepts like this in your career with CFO Coaching.  Learn More

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Restructuring Expense

See Also:
How to Estimate Expenses for an Annual Budget
Administration Expenses

Restructuring Expense Definition

Restructuring expense is defined as the cost a company incurs during corporate restructuring. They are considered nonrecurring operating expenses and, if a company is undergoing restructuring, they show up as a line item on the income statement.

Restructuring Charges Meaning

The term, restructuring expenses, is also a footnote in the financial statements that describes the details relevant to the restructuring charges. These charges often include cash costs, accrued liabilities, asset write-offs, and employee severance pay due to layoffs. Restructurings may occur during a major reconfiguration of business operations or during a change in upper-level management at a company.

Big Bath Charges

Financial statement analysts pay special attention to restructuring charges. This is because they may reflect past or ongoing problems with the company’s business operations or corporate structure. Also, managers have considerable leeway in deciding when to record restructuring charges and what to include in the restructuring charges. Companies then may deliberately report a large restructuring expense to manipulate current earnings. The practice of taking a very large restructuring charge is known as taking a “big bath.” The idea is to take a big hit to earnings in the current period in order to make future period earnings appear more profitable. Big Bath Charges are more common in public corporations than private companies.

Restructuring Charges Example

Bubba is the chief accountant at a middle market food distribution company. Bubba has worked extremely hard to achieve his title and enjoys his work. Recently, Bubba has been notified by the board of directors of his company that they will restructure in the next quarter of operations. The company tasks Bubba with accounting for this reformation. It is Bubba’s job to make sense of all of the restructuring charges that the company experiences in this quarter.

Restructuring Charges Example & Steps

First, Bubba receives the memo that the company will convert the current inventory accounting system to an electronic, RFID (Radio Frequency Identification) based system. Here, the company places a small tag on each boxed order received from suppliers. This will occur by simply adding a tag to each box, a radio frequency signal emitter at the entrances of the distribution warehouse, and software which works as a go-between to this hardware and the company accounting software. This tag, in operations, will automatically read boxes as they enter and exit the distribution warehouse. Based on the tag placed in each box, the system will know what, how many, and when inventory is received and delivered. Once this change has occurred, the company will greatly reduce man-hours once used for processing inventories. Bubba finds invoices which total in the amount of $45,000.

Tracking System

Next, Bubba is notified that the company trucks will be equipped with a GPS (Global Positioning System) tracking system. This will allow the company to know exactly where every single truck is, reducing personal stops and protecting company equipment from theft. This system, from the records Bubba has collected, will cost the company $25,000 for hardware, software, and labor on installation.

Statements

Finally, Bubba prepares company statements. He presents these expenses as incurred, rather than showing a “Big Bath”. This will result in logical financial statements, as well as protecting Bubba’s reputation.

Bubba has completed his project to the satisfaction of the company board of directors. For this project, the board has decided to give Bubba a pay raise due to the quality of his work. It pleases Bubba to hear this. He is happy with how he ended this project.

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Restructuring Expense

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Insolvency Definition

See Also:
Chapter 11 Bankruptcy
Chapter 7 Bankruptcy
Bankruptcy Costs
Bankruptcy Information
Fixed Charge Coverage Ratio Analysis

Insolvency Definition

Insolvency is the inability to pay debts when they are due. It also occurs when a company’s liabilities exceed the value of its assets, if you cannot readily cover these the assets into cash to repay debts. Apply this to either individuals or organizations.

Insolvency Leads to Bankruptcy

Insolvency often leads to bankruptcy. However, you can avoid bankruptcy if the debtor can restructure or renegotiate delinquent debt payment. Out-of-court renegotiation of delinquent debt is called a workout.

There may be potential destroyers impacting the value of your company. So, download the Top 10 Destroyers of Value whitepaper.

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