Are your company’s finances deteriorating? Consider restructuring to get your business back on track to profitability.
Don’t wait for the situation to get worse. Be proactive and act before it’s too late.
To respond in an appropriate and timely manner, you need to pay attention to the warning signs and take them seriously. Issues to watch out for include rapid growth, decreased profitability or repeated losses, loss of an important client, major quality flaws or underperforming financial systems, to name just a few.
These events in the life of a business, if not adequately addressed, can lead to cash flow shortages with many serious consequences:
- Difficulty paying invoices and salaries;
- Failure to comply with financing conditions;
- Deteriorating financial ratios;
- Financial reporting that is inaccurate and not up to date;
- Significant rise in employee turnover.
It’s important to watch out for the warning signs and act as quickly as possible to avoid a liquidity crisis. The longer you wait, the fewer tools will be available to help your business.
Diagnose the issue
The first thing you need to do is perform a realistic assessment of the situation.
1- Analyze the situation
Analyze the operational situation for each business unit as well as the financial structure. Doing this will help you identify the source of the issues. You should review every single department and each employee, looking at all the relevant expenses, tasks and operational processes. It’s also important to verify that all your equipment is working properly and efficiently.
2- Consult with your employees
Don’t forget to ask your employees for their input. They can point out deficiencies and suggest solutions.
3- Prepare a cash flow projection
The next step is to create your short-term (3 month) cash flow projection and identify your borrowing capacity. Maintaining positive cash flow is key to your restructuring plan because it will give you the time you need to straighten out your company’s finances. This short-term cash flow projection is critical. It will indicate how much time you have left to act before your business runs out of funds.
4- Evaluate long-term viability
Finally, evaluate the long-term viability of your business by establishing monthly (for the first year) and annual financial projections. Simulating a range of scenarios will help you determine how much financial leeway you have and what you need to do in order to maintain a sufficient profit margin.
Ask for help
Restructuring is a complex and demanding process. You’ll have your hands full managing emergencies and day-to-day activities.
Get an expert to guide you
Working together with a restructuring specialist is highly recommended. They’ll be able to objectively analyze your situation and guide you through all the steps that are new to you.
Form a crisis management team
At the same time, set up a crisis management team and simplify the governance structure to make it more agile.
Get the support of your bank
Another key point is to get in touch with your bank as soon as possible. Explain the situation and tell them how you plan to get your business back on track. Ensure that you have their support.
Don’t forget your partners
Pay particular attention to your relationships and communications with suppliers, clients and employees. They are key stakeholders in the success of your restructuring plan.
The keys to successful restructuring include swift action, not being complacent and addressing real problems, and maintaining seamless communications with all stakeholders.
Next, you’ll need to prepare and implement various restructuring measures, which can be either operational or financial in nature.
- Review your business plan;
- Closely examine each department to identify areas where you can reduce expenses. Make sure to carefully analyze the impact of each reduction. For example, what would happen to sales if you cut your advertising budget?
- Shut down unprofitable divisions following a detailed profitability analysis;
- Analyze the profitability of contracts in order to modify or terminate those that aren’t profitable. For example, you might decide to reduce the number of products sold to a client and only maintain those that are profitable;
- Discontinue products or services that are not profitable or that contribute very little to your business objectives;
- Review your operational processes;
- Renegotiate property leases;
- Renegotiate working conditions or collective agreements with employees.
For these measures to be effective, you’ll need to establish an action plan outlining specific objectives and follow up periodically to update your plan as needed.
Note that laying off employees and terminating business contracts or commercial leases can be very costly and can compromise your company’s restructuring plans.
- Review your working capital management strategy so you can quickly free up cash and have the time to restructure the business. Try to negotiate longer payment terms with your suppliers and shorten payment terms offered to your clients (for example, by offering rebates);
- Restructure your debt by renegotiating terms and interest rates on loans;
- Sell or liquidate surplus inventory.
Two restructuring approaches
If you want to ensure the survival and future feasibility of your business, you’ll need to reach an agreement with your creditors. There are two possible approaches:
- The informal approach, outside the legal framework;
- The formal approach, as laid out in the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA).
The informal approach
- The procedure is confidential. That means you can negotiate an agreement with one creditor without the other creditors finding out the conditions you agreed on;
- Applies to simple situations;
- Applies to renegotiations with a single creditor or a small group of creditors with similar interests (for example, renegotiating contracts);
- The company should have a detailed and comprehensive business and restructuring plan (timeline, restructuring costs, etc.).
The formal approach
- For situations where the company is insolvent but has the potential to become profitable again thanks to a restructuring plan. Being insolvent means no longer being able to pay your debts on time or having more liabilities than assets;
- Public procedures governed by the provisions of the CCAA (for companies that owe more than $5 million to creditors) or the BIA;
- Protects your assets from being seized by creditors;
- The legal proceedings must be initiated by a Licensed Insolvency Trustee (LIT).
Once the LIT submits the required legal documentation, your liabilities are automatically frozen and you are protected from legal action by creditors. This will give you the time to prepare a restructuring plan with the help of the LIT.
You will also put together a proposal or arrangement with your creditors. On average, accepted proposals represent 8% to 10% of the total amounts due.
The proposal is then submitted to a vote by creditors. To be approved, the creditors must accept the proposal by a majority in number (50% +1) representing at least two thirds of the value of the voting claims. The proposal is binding on all creditors. In the vast majority of cases, proposals are accepted.
If the proposal is accepted, directors may be discharged of their liability for unpaid government debt (sales taxes, etc.).
Do you have questions or need advice on how to turn around your company’s finances? Contact our experts today!
This article was written in collaboration with Ayman Chaaban.