How can you identify financial distress that triggers restructuring?

There are lots of financial issues that are cause for alarm. In my experience, cash flow problems are the most acute pain that's a symptom of deeper sickness. Cash flow usually isn't isolated to mismanagement of cash -- it's eroding margin, poor spending habits, bad management decisions, fixed costs that are too high, and much more. Keep an eye on cash problems as they're usually an indication of bigger problems.

Management skill set & knowledge base in change & transformation of business plays a critical part in how your forward thinking & manage change. We witness very successful business suddenly drifted into default & dwindling return / income. Management competency is a critical factor to understand business change & how they can transform their business through turbulence waters .

Some common restructuring strategies to improve cash flow: Debt restructuring: Renegotiating loan terms, extending repayment periods Reducing overhead expenses, renegotiating vendor contracts to improve profitability and cash flow. Selling non-core assets or subsidiaries to generate immediate cash inflow. Optimizing inventory levels to minimize carrying costs. Developing accurate cash flow projections manage liquidity effectively. Seeking additional funding through equity investments, loans, or credit lines. Evaluating the organizational structure and making strategic changes. Negotiating favorable payment terms or offering discounts for early payments. Engaging with suppliers to negotiate extended payment terms or discounts.

If a company has a negative cash flow, it often happens that it is too late to do something. Nevertheless, this is not a reason to start immediate restructuring. First you need to understand how to quickly reduce costs, including staff cost, whether it is possible to get credit from suppliers, whether it is possible to take a short-term loan, whether it is possible to quickly increase sales by giving a discount to buyers, whether there are options to get some state subsidy. If these measures have not helped, we need to look at more radical options.

I couldn‘t agree more. The aim to generate true free cash flow has to be embedded in the company DNA. It is important to explain your wider management that a P&L doesn’t stop at EBITDA before exceptional items

My experience in this field has indicated that most businesses do not really know their costs. Cost structure and the way it changes needs to be mastered.

I restructured one of my companies because it would need a license to continue as a corporate services company. So, I turned it into a passive investment company because it had a lot of financial assets. I also converted a holding company into an alternative investments and support services company. No financial issues but restructuring was required because of changes in circumstances.

This is yet another conceptual mistake. Low profitability is a logical cause of financial distress, not a sign of it. Often, Companies manage to remain EBITDA-positive, but financing cost turned unsustainable due to undisciplined or wrong-sized capex investments. Right-sizing the Company's asset base to a sustainable business - probably thru disposal, swap and debt restructuring - is key.

I agree wih you. I remember employing zero-based costing in order to intro a new hotel concept many years ago. It was a resounding success!

There are two core reasons for this, those you can control and those you can’t. Make a list of the latter first, accept it and then move to those that you can control. Based upon the list of things you can control, take action…depending on the urgency, don’t debate/deliberate for too long!

If the liabilities exceed its assets, legal requirements should be initiated by the responsible management organs. Especially, the board should take timely actions for convening the shareholders to increase the equity capital or subsist with the level of equity at hand whatever the applicable laws require.

Negative equity becomes a solvency issue if you cannot meet your obligations as they fall due. Negative equity is an early indicator of potential long term issues but if you are solvent (CAN meet your liabilities as they fall due) negative equity is not, in and of itself, a fatal flaw.

A great business plan with the restructuring strategies needs to be established and a three way cash forecast is fundamental to steer a business out of this plight.

The legal position is clear if you are found to be operating an insolvent business. Take professional advice well in advance, again back to my earlier point about forecasts, as this situation should not arise overnight…except in some extreme events! Communication with the right people at the right time will get the right outcome.

If a Company gets there, it is probably too late to worry about equity. Emphasis should be on cash flow generation, not even profitability, to keep the Company above the water and avoid insolvency: i.e. the incapacity to pay its debt when it becomes due, whether vis-à-vis banks or suppliers or employees...

A breach of material covenant such as the debt service coverage ratio (or "DSCR"), which measures a business's net operating income to its debt service, may often serve as the "canary in the coal mine," so to speak, as a harbinger of future financial distress. If a borrower is unable to meet its DSCR, its lender will need to examine the reasons behind the borrower's failure to do so in order to determine its next steps with respect to loan enforcement.

Financial covenants need to be set at a level, and tested at a frequency, sufficient to give time to investigate and (if possible) solve any underlying issues that give rise to breach. If they are only tested six monthly (or, worse, annually) then stakeholders may be playing catch up with an out of control cash situation that could have been averted with a quarterly (or more frequent) set of covenants, crafted sensibly to fit the business and delivered on a timely basis after the period end. An interesting feature of the past few years has been the relaxation of covenant requirements as money has been chasing deals. In a challenged interest rate environment that will bring cash flow issues to the fore - and complicated times for lenders.

Breaches of covenant occur "ex post"; hence, these are useless monitoring tools unless the Company and the Banks have a forward-looking set agreed upon. I have seen that very rarely. As a result, covenant breaches serve merely as an occasion to come back to the negotiating table, where Banks already know that they will have to restructure in order to avoid the most drastic covenant: payment default, and provisioning consequences.

I am not sure how relevant this could be to financial distress but if the company with negative equity utilized a loan this is certainly a matter to concern about. On the other hand, any company should observe its contractual liabilities towards third parties because these also may contain a big figure on the liabilities side of the balance sheet that may cause irregularity in the cash flow.

Don’t let your lender tell you that there’s a breach! Understand them and put regular/routine processes in place to measure against them. Once you start to see a potential breach is coming, assuming you can’t change it, then you can proactively contact your lender & they will be much more amenable. If you are able to take corrective action, depending on the timescales, get on to it accordingly.

Especially, publicly traded companies' main liability is to protect the interest of their minority shareholders. If there are not sufficient reserves allocated in the equity of the company for covering the damages of these shareholders because of wrongful decisions of the company, negative results of potential disputes may be severe.

Stakeholders pressure is not a very popular reason for restructuring unless there are signs of all the four preceding problems. Mismanagement, poor operations, rising debt, inability to face competition, and non reactive to growth opportunities can be some of the reasons. Stakeholders pressure can lead to LBO (leveraged buyout) and more often MBO (management buyout).

Always understand where these pressures may arise and, where possible, have clear written terms that are mutually accepted. Things change but again be ahead of the game, regulatory/compliance pressures are commonplace and someone in the business needs to be dedicated to monitoring these potential risks.

It is also extremely important to choose the right financing partner for your business. Even lenders are critical stakeholders in a business and choosing a lender with a different strategy / mandate and perspective could easily put undue pressure on the business forcing it into a restructuring.

A separation at the shareholder level is also possible. There are probably situations when shareholders have a different vision about the company's strategy: to sell or develop a large asset, whether to agree to a major M&A deal, and so on.

General Motors (GM), once a symbol of American industrial might, faced a perfect storm of problems leading to its 2009 bankruptcy. Investors could have spotted clear warning signs: - Years of poor profitability or outright losses painted a bleak picture of GM's business model. - The mountain of debt made GM extremely risky and sensitive to economic downturns. - Shrinking market share signaled consumers were choosing competitors over GM. - Negative news coverage about GM's labor woes and outdated product lines damaged their image. A government bailout helped them restructure and GM has since recovered, but the case highlights the dangers of complacency, legacy costs, unsustainable debt, and the impact of external economic shocks.

Given that this is an AI collaborative article about early warning signs, it probably not surprising that the content has focused on output data. This focus on adverse data is a focus on the consequence of actions and misses the causal factors behind the data. We might all agree the need to monitor data so it can be used to make decisions, we shouldn’t ignore the need to monitor monitor input data. It can be more difficult to gather but the insights offer scope for earlier and better decision making. Everyone knows that ‘Strategy eats Tactics for Breakfast’ but key to delivering strategy are the behaviours that determine culture where ‘Culture eats Strategy for Breakfast’.

Lack of investment into renewing fixed assets in manufacturing concerns could indicate declining productive capacity, unless there is other evidence of investment in such capacity

With respect to covenant violations, a failure to provide financial statements or tax returns when required is a red flag. A material gap between the time a CFO/Controller leaves and when a new person comes aboard, or substantial turnover in the accounting department are also a sign of potential problems.

Other early warning signals include: 1) The absence of a clear and consistent business policy, and 2) Weak information provision.