When it comes to financing, companies need to check their strategies rapidly as the world of business lives a wide range of changes. The first indication that companies go right towards their goal is whether they achieve their financial objectives. In order to come up with a flexible finance plan, they need to apply what is called “financial restructuring.
Finance restructuring is a term that is often used in the business world, but not many people fully understand what it means. In simple terms, “financial restructuring” refers to the process of reorganizing a company’s financial structure. This is typically done to improve the financial health of the company, and it can involve a variety of different strategies and tactics.
One of the primary reasons that a company might consider financial restructuring is because it is facing financial difficulties. For example, a company may be struggling to make its debt payments or face a cash flow problem. In such situations, financial restructuring can help reduce the company’s debt burden and improve its financial stability.
When talking about financial restructuring, there are two primary pillars to think of; debt restructuring and equity restructuring.
Debt restructuring
As the name suggests, “debt restructuring” refers to reorganizing the company’s entire debt capital and obligations. The balance sheet is more commonly used as a financial tool for debt restructuring than equity restructuring. It involves the reorganization of balance sheet items as it contains the debt obligations of the company. Consequently, a company’s financial manager should always consider ways to minimize the cost of capital and improve the efficiency of the company in general, which will in turn require a continual review of debt and recycling it to maximize efficiency.
Why would companies turn to debt restructuring?
First, it’s essential to highlight debt restructuring differs from one company to another based on its needs, circumstances and financial status. However, we can say that debt restructuring is categorized into these 3 main kinds of reasons.
- In a healthy company, it is possible to restructure its debt to take advantage of the market opportunity by replacing the current high-cost debt with low-cost borrowing.
- Debt restructuring is a way to reduce borrowing costs and increase working capital for a company facing liquidity problems or low debt servicing capacity problems.
- Restructuring can also be conducted by a company whose current financial obligations cannot be serviced with the resources and assets it has available. In short, an insolvent company can go for restructuring to make it solvent and free it from losses, thereby making it viable in the future.
Equity restructuring
This is another kind of financial restructuring. The purpose of equity restructuring is to reorganize equity capital, including the reorganization of shareholders’ capital and the reorganization of reserves. There are a number of laws and regulations that must be followed when restructuring equity and preference capital. It mainly involves the concept of capital reduction. It is a highly regulated field.
Methods of equity restructuring
There are several ways to restructure your equity capital in your company, however, choosing the right way depends on your conditions. Here are the main 3 methods of equity restructuring:
- In order to facilitate the restructuring of share capital, shareholders may purchase the shares for cash. This will reduce the company’s liability to its shareholders, resulting in a capital reduction by returning the shares. Also within this category is the conversion of equity capital into redeemable preference shares or loans.
- By reducing equity share capital through certain accounting entries, the company can reduce the amount owed to shareholders without actually returning equity capital.
- The restructuring may also be accomplished by reducing or waiving the dues required of shareholders.
After all, financial restructuring is a complex process that involves reorganizing a company’s financial structure in order to improve its financial health and stability. If companies want to increase their revenue, they need to look at the overall picture and put the best plan in place.