Need of Financial Restructuring in 2019
04

Feb 2019

The business environment of a country is very dynamic and can never be predicted accurately. It would help if you regularly change the business model of the business or it may 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 the business afloat, you need to carefully decide upon a strategy that would ensure that your company has a long lifespan in the fluctuating business environment.

The inflow of new business environment sometimes poses as a threat to the previously established companies as the new companies may be technologically advanced or may have good financial backing. In such a case Financial Restructuring may be the only option left for you. Possessing a clear knowledge about financial re-structuring helps business owners to tackle multiple issues or overcome difficult times.

Let’s dig more in-depth as to what financial restructuring is.

What is Financial Restructuring?

Financial Restructuring is a process in which the management reorders and then rearranges the economic configuration of a company with the motive of making the company more profitable than before. 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

Financial Restructuring comprises two elements:             

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.

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. It is required for a business to conduct Financial Restructuring for the following reasons:

1.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.

2.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.

3.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 would provide with a competitive advantage against other businesses.

4.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.

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.

Rampant Inefficiency

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 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 UAE. Our business experts provide customized solution to your business problems. In case of any questions, please contact us, we’d be glad to assist you.