The process of informal restructuring

Informal restructuring is commonly termed a turnaround, although as one successful Australian CEO once said, “every business needs to be turned around every day”.

Under Australian law, an informal turnaround is only possible when the business is solvent – if it is not solvent then an informal restructuring may not be appropriate as it may expose the directors (and any person who could be called a director under the Corporations Act) to personal liability for the debts of the company.

A business is not solvent (i.e. it is insolvent) if it cannot pay its debts as and when they fall due.

Where a business is losing money but solvent, a turnaround is the most suitable solution.

Turnarounds often involve drastic restructuring to ensure “a business” survives (which may not necessarily look the same as the business before the turnaround took place).

There are 4 main stages to a turnaround. These steps may often overlap in the early stages of a turnaround but it is important that the steps are treated as a hierarchy during the turnaround process. Click here for further information on the BIR Turnaround Model.

Step 1 Stop the Bleeding – there is often an initial focus on gaining control of costs to identify the extent of any cash bleeding and minimise it. At this stage of a turnaround, “cash is king”.

Step 2 Implement operational improvements – this often overlaps with stopping the bleeding. Although they are not the primary focus in the early stages of a turnaround, they become of greater significance when implementing sustainable improvements in performance.

Step 3 Focus on generating more sales to better (i.e. profitable & cash positive) customers – in each business, you need to identify who are these customers by reviewing past results and looking at future market opportunities.

Step 4 Build sustainable growth – focus and refocus on generating sustainable cashflow, profits and revenue.

To achieve a successful turnaround, you need to

  • Focus

    It is important to focus on those key issues which are having the most significant impact on cashflow, then profitability then revenue. In any turnaround situation “cash is king”. Only once any cash crisis is resolved can focus be turned to profitability and then sales.

  • Get information

    Gaining an intimate knowledge of the business operations is critical if key customer service aspects are not to be adversely affected by any cost cutting strategies.

  • Centralise before decentralise

    To gain the level of knowledge required to allow decision making to be made quickly, information and control is often centralized in the initial stages of a turnaround. Once the initial cash crisis has been controlled and the management team and employees are aware of the new business strategy, it is often appropriate to start allowing decisions to be decentralised, thereby allowing more effective handling of day to day issues.

  • Communicate

    Setting up communication channels so stakeholders are kept informed is critical to ensuring the support of all the parties who are likely to be impacted by the turnaround (particularly employees, suppliers, financiers and shareholders).

  • Take Action!

    Good ideas without implementation or slow procrastinated implementation may well result in the failure of the turnaround. Speed and decisiveness can often be critical in difficult situations.

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