Financial Turnaround & Restructuring

Rethinking Transformation Initiatives in a Time of Crisis

The main objective of transformation initiatives is to elevate the financial and operational performance of a business from mediocre to world class. Typically, an initiative commences when a company is already financially and operationally healthy. However, given the current global pandemic, the definition of “transformation initiative” may be very different.

The grim reality is that the health of many businesses will be worse off once the world emerges from the COVID-19 lockdown. To stay afloat and make a speedy recovery, many adversely affected businesses may need to seek professional turnaround and restructuring advice in order to craft a transformation initiative suited to today’s unique challenges.

Crisis Phases Before Insolvency

Before attempting to design a transformation initiative, it’s important to know where your business stands. A business may go through three crisis phases before it becomes insolvent, namely:

  • Strategic Crisis
  • Profitability Crisis
  • Liquidity Crisis

Let’s take a look at each phase:

Strategic Crisis

Here, the financial performance of a business is healthy, but it is no longer competitive in the marketplace. A business experiencing a strategic crisis is often characterized by declining profitability even though it might not yet see a decline in top line revenue. The lag time between the decline in revenue and profitability may be due to several reasons that include an increase in cost of sales and the inability to proportionately distribute this additional cost to customers, engaging in ineffective and costly marketing campaigns, an increase in competition resulting in further deterioration of margins and the inability to penetrate into new and more profitable markets or segments.

Many businesses in the strategic crisis phrase may have already tried modifying their existing strategy, but without success. They usually still have a relatively healthy balance sheet and can make a timely resurgence by generating a clearer picture of key issues and reevaluating existing strategy. This can be achieved through the following:

  • Top-down analysis of the business and development of a performance improvement strategy where all employees share this common goal
  • Bottom-up performance improvement to ensure that division heads have the flexibility to implement effective solutions to the immediate issues at hand
  • Interdepartmental process redesign to link activities, functions and information in new ways to achieve breakthrough improvements in cost, quality and timeliness

Troubled companies in a strategic crisis can also engage management consultants to perform an unbiased reevaluation of current business strategy, make recommendations and implement new business plans.

Profitability Crisis

If a business is unable to overcome its strategic crisis, it will eventually face a profitability crisis. A business in a profitability crisis will not only continue to see a decline in profitability but also a decline in top line revenue. Consequently, to combat negative profitability margins and remain in operation, the business will need to start dipping into cash reserves. Management must act immediately to prevent an uncontrollable liquidity bleed and free up capital to structure and implement a turnaround plan.

In addition to the course of action recommended for a strategic crisis, a business in a profitability crisis should also consider the following:

  • Setting turnaround plan objectives, a realistic timeline and KPIs to track progress
  • Implementing a turnaround plan with measured realization of objectives
  • Addressing structural failures of management
  • Streamlining the operation
  • Assessing liquidity and capital structure
  • Managing cash and liquidity

Liquidity Crisis

Failure to stop a continuous cash burn will deplete the cash reserves of a business, making a liquidity crisis inevitable. Very often, a business in a liquidity crisis does not have adequate resources to make the significant changes that could improve its fortunes and prevent insolvency. At this point, debt holders will have lost confidence in the business. They may not only be unwilling to provide additional financing but also may force the business into bankruptcy, hoping to salvage some value from their non-performing loans.

Ultimately, when all options have been exhausted, the best course of action for the business is to file for Chapter 11 bankruptcy protection in order to gain some breathing room to restructure operations. There are several advantages to filing for Chapter 11 bankruptcy protection including:

  • Freedom to restructure and reorganize debts
  • Automatic stays against creditors
  • Ability to operate while paying off post-petition creditors
  • Access to debtor-in-possession (DIP) financing which otherwise would not be available

A business experiencing a liquidity crisis and considering Chapter 11 bankruptcy protection should engage experienced bankruptcy attorneys and financial advisors who can navigate through the complex and convoluted Chapter 11 process rapidly and cost effectively.

Tap Experts to Drive Successful Transformation Initiatives

To structure and implement a successful transformation initiative, management must make timely and efficient decisions no matter what crisis phase their business is in. To do this, an outsourced CFO or third-party consultants may be needed. Look for a team of highly experienced turnaround and restructuring advisors who can provide immediate and effective hands-on financial, operational and strategic assistance on short notice, giving you the ability and agility to ensure stabilization.

If your business is facing a strategic, profitability or liquidity crisis, please reach out to 8020. We’d be happy to answer any questions. Our team is committed to the values of “continuous improvement” and “focus on the critical” with the goal of generating immediate business stabilization results.

business stabilization and contingency planning

About the Author

Prior to joining 8020 Consulting, Joe was an Investment Banker with experience in capital and debt markets, M&A, IPO, credit, distressed assets and financial assurance. His key responsibilities include buy-side and sell-side M&A, subsidiary spin-offs, capital raising through the debt and equity markets, structuring of hybrid securities, turnaround and restructuring and due diligence support. Over the years, Joe has advised and raised capital for REITs, property developers and major palm oil players. Joe has also lived and worked in a few of the world’s major financial cities such as Los Angeles, London, Singapore and Hong Kong. Joe graduated from the University of Southern California, and he is Chartered Accountant with the Institute of Chartered Accountants in England and Wales. Joe also holds the following FINRA licenses: Series 24, Series 63 and Series 79.

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