The business environment of a country is very dynamic and can never be predicted accurately. It would greatly help for the business if you regularly change the business model of the business or it is possible that the business will not be able to keep up with the technological, social or political changes of the country. If you want to be a profitable venture and want to keep your business afloat then you need to carefully prepare a strategy that would ensure that your company has a long lifespan and is ready to endure this fluctuating business environment.
The inflow of new business in the environment sometimes poses a threat to the companies and businesses which have been previously established. The new companies may be technologically advanced or may have good financial backing and in such a case the only way for a previously established company to compete with the newcomers is by Financial Restructuring. Possessing a clear knowledge about financial restructuring will help a business owner to tackle multiple issues or overcome difficult times.
Let’s dig more in-depth into what financial restructuring is.
What is Financial Restructuring?
Financial Restructuring can be understood as a process in which the management of the company reorders and then rearranges the economic configuration of a company. This is done with the aim of making the company more profitable than before and so that the company can withstand the environmental change in the business environment. This may also be done if there is a change in the ownership of the company, in case of a major crisis like bankruptcy or when there is a change in the strategy of the company.
Let’s have a look at its components.
Components of Financial Restructuring
There are two major components in Financial Restructuring. These are:
I. Debt Restructuring
When all the debt capital of the company is restructured, it is called Debt Restructuring. This comprises of reorganising the balance sheet items of the company and is the most commonly used financial tool. The financial manager of a company always tries to lessen the cost of capital and also improve the company’s efficiency.
II. Equity Restructuring
Equity restructuring is the method to reorganize the equity capital of a company. It consists of the restructuring of the capital of the stakeholders and also the various reserves appearing in the balance sheet. Restructuring of equity is controlled by law and thus is a very complicated process and mainly deals with the notion of decreasing the capital of the company.
What is the Need for Financial Restructuring?
Financial restructuring is mostly considered as a last resort but is the most effective option for a business. There are a number of reasons for due to which a business conducts a Financial Restructuring. These reasons are as follows:
To Revitalizing a Business
When a business is slowly declining, one needs to take some concrete steps towards the revival of the said business, or it may finally be lost into oblivion. In order to revitalize the business the management may look into changing or reorganizing the various financial instruments used in the business workings.
To Increase the Value of a Business
Once your business has revived, it is necessary to increase its value, in the business environment, so that it is not over-shadowed by its competitors. The management needs to plan the financial aspect of the business in such a manner that the value garudally increases/
To Stand Ahead of the competition
The complete financial restructuring of the business would leave you with extra resources which can be then put to good use. This reduction in wastage of resources will provide with a competitive advantage against other businesses.
Boost Company’s Growth
Re-structuring a business might open new business options. Choosing this option might lead your business to new opportunities for it to grow and prosper. The company may also look into expanding its business or getting into new markets.
When Does Your Business Need a Financial Restructuring?
It would help if you never overlook the ominous signs as initially, the business problem may look small to you, but they can turn into a crisis very quickly. As soon as you see the signs, you must begin some preventive steps so that you can tackle the problem. Let’s look at some of the indications that would signal that the business is in financial distress and needs reform:
The Occurrence of More losses
Restructuring of the finances can segregate the necessary expenditure from the unnecessary ones. This would leave you to with a more significant profit margin and would help in covering the losses of the business.
There may be procedural inefficiency in your business and financial restructuring may help to keep this in check. It would organize your business and help in running your business without hindrance.
Longer time to Pay Back Debt
Long term debts can put heavy stress on your business. The financial reorganization will help in planning ahead and also help in freeing of more funds so that your business will continue to grow by leaps and bounds.
Erosion of Market Share
If the market shares of the business decrease, it would be an advantage to the competitors. The process of financial restructuring will provide a boost to your business by removing the unnecessary activities out of the way and enhancing your business’ productivity.
Rapidly Expanding the Business
Though expansion is a symbol of a competent and successful business, the quick expansion of the business to various geographical locations can lead to the decentralization of power. Financial restructuring can help in the expansion process by accurately mapping the future of the business.
In conclusion, it can be said that Financial Restructuring is a very effective way of bringing the business to its track and making it more profitable but it should be used only as a last resort. With proper planning and correct utilization of resources, you will never have to use this process, but if you do then make sure that it is done by experts. We at JAXA can help you in this matter. We are a team of professionals that provides focused and customized accounting services in Dubai and are considered as one of the top business accountants in the UAE. Our business experts provide a customized solution to your business problems. In case of any questions, please contact us, we’d be glad to assist you.