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Articles From Brisbane Consulting Group

Restructuring: How Business Owners Can Get Their Groove Back

The COVID-19 crisis has affected virtually every business. Many small business owners may be ready to throw in the towel, but restructuring can provide a fresh start. This is a highly complex process that needs to be continuously monitored for possible revisions, especially in today’s uncertain, volatile market conditions.

Here are four ways financial experts can help management get back in the groove by harnessing cash flow and actively managing the company’s finances.

1. Create three- to six-month cash flow projections

Budgets and forecasts that owners made in January were typically replaced by gut instinct and short-term working capital management strategies during the first several months of the pandemic. Getting back on track starts by formally projecting cash flow for the next three to six months.

These projections can help identify current sources and uses of cash — along with possible shortcomings. Then owners can brainstorm ways to bridge gaps (such as lines of credit or small business loans) and eliminate major drains on cash (such as unprofitable business segments or excessive overhead expenses).

One key area to focus on during recovery is collections. It’s critical to send bills out on time and follow up with customers once their payment deadlines have passed. Nobody likes making collection calls. But, if a customer has a serious problem, it’s better to find out as soon as possible and negotiate the best possible outcome.

2. Get debt under control

Businesses with heavy debt loads may need help renegotiating their loan terms to facilitate an effective restructuring. For example, an owner might request a lower interest rate, a longer amortization period, or possibly even debt forgiveness. However, beware: Cancellation of debt may have tax consequences.

Another strategy is a debt-for-equity exchange, which is when a creditor replaces its debt with a percentage of ownership in the business. This solution could result in a surrender of company leadership, depending on how much control creditors gain. But the flipside is the prospect of future growth: Debt-for-equity frees up money that the company would have previously spent on debt repayment.

Coming to a debt agreement with creditors isn’t always possible. But it’s worth a try for businesses with strong working relationships with these parties, because it helps preserve the company’s credit rating and reputation.

3. Monitor business essentials

Another proactive step toward recovery is closely managing operational functions. For instance, does the company’s accounting system provide the information needed to make effective day-to-day business decisions? The system should generate weekly performance summaries that provide management with relevant, real-time information, allowing them to pivot based on changes in the marketplace. In addition, several major changes to the accounting rules in recent years may necessitate an accounting system upgrade.

Business owners also should meet with their financial advisors before year-end to brainstorm ways to lower their tax obligations for 2020. Plus, there may be opportunities under COVID-19-related financial relief measures to file amended returns for prior tax years. Amended returns may provide tax refunds that can be used to cover current expenses.

4. Invest in marketing

A big mistake some struggling businesses make during economic downturns is to reduce spending on advertising and other marketing-related efforts. But if owners cut marketing expenses too heavily, they’ll end up without the new business needed to survive — and revenue will flatline.

Marketing personnel can also help management develop new products and services or find market segments that haven’t been tapped into yet. However, owners should avoid straying too far from their core competencies. For example, companies that specialize in business-to-business contracts might encounter challenges if they start selling directly to consumers or if they apply for government contracts.

Ready, Set, Restructure

Restructuring a business in today’s volatile market conditions is no easy task. It’s critical for management to keep their eyes on developing issues and discuss them with people inside and outside the organization. A financial professional can provide objective insight based on real-world experience and a keen understanding of the latest tax and accounting rules. Their expertise can help small businesses minimize risk factors, return to financial stability, and build long-term value.

Restructuring: How Business Owners Can Get Their Groove Back

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Bill is a partner with Brisbane Consulting Group Business Valuation Division, providing business valuation, forensic accounting, and litigation support services. His valuation experience includes the valuation of closely held companies, covering a wide range of industries and engagements including: marital dissolution, dissenting shareholder disputes, estates and gift tax planning, merger/acquisition, and due diligence reporting.

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