Corporate Restructuring Tough but Necessary

THI AUDIT ROMANIA S.R.L.

Many companies currently face the specter of insolvency. Restructuring the business is a way around the cliff – though it involves hard choices.

Over the past three years, many companies took on much debt, making them more sensitive to the current economical and financial crisis. Now, companies are facing various kinds of difficulties and are looking desperately for solutions. A simple daily perusal of newspapers is instructive in this regard; but an even closer look at the companies' legal and financial situation reveals that an increased number of companies will soon be interested in valorizing their assets as their values are rapidly going down. Lack of funds to pay due debts is usually what forces a company into insolvency proceedings - even if the company's assets are sufficient to satisfy the demands of its creditors and irrespective of whether the creditors have claims on company assets as securities. Insolvencies, however, are not always a result of legal necessity; there are many cases where the debtor voluntarily initiates a restructuring before a court of law in order to protect itself against enforcement of creditors' claims. Unfortunately, Romania does not possess a legal framework that would regulate a restructuring process as a preventive measure before commencing insolvency procedures. Nevertheless, there are various management measures that can improve a company's performance within a certain period of time if they are adjusted to the specific cases at hand. Backed by appropriate legal assistance during the negotiations with the creditors, suppliers and other business partners, these measures may save the company from financial shortages. It is always better to prevent a crisis than having to cure its effects.

 

Better before bankruptcy

The smartest way to avoid insolvency is to restructure the business before or during the first signs of weakness. Restructurings are not something new, brought to the fore by the global crisis. Even before that, companies would get into trouble because of bad management, critical exposure to the credit market or other unfavorable circumstances. By contrast, good management means to assess the level and riskiness of a company's cash flow and to structure financing in such a way that it maximizes benefits and preserves the flexibility to deal with new opportunities or adverse circumstances. You may think now that restructuring is tough - and you are right. Like any complex matter, however, the process can be split into small pieces and approached step-by-step. As an example, take a restructuring plan that aims at finding appropriate financial resources to covering a company's overdue debts. Such a plan can involve the following measures: E searching for potential investors to boost the company's capital by way of a share capital increase; E rescheduling trade debts to optimize the company's cash flow; E attuning payments to collection of receivables; E renegotiating loan agreements; E renegotiating contracts with business partners on discounts and other benefits; E downsizing merchandise inventory to the real needs of the sale structure. Theory always diverges from practice, of course, and every company should implement a restructuring plan only after it has completed a thorough analysis of its profitability to find the optimal solutions for improving its results.

 

Improving the cash flow

Consider the following case study of a smooth and sound restructuring that allowed a textile retail company to substantially improve its cash flow and diminish its exposure to the credit market over the past two years.

• Measures before the crisis

The target of the restructuring plan was to significantly improve financial and cash positions so as to attract additional funding for regional expansion. The following case study only presents the cash improvement strategy. At the beginning of the restructuring, the company was generating a negative cash flow, both operationally and financially. There was no immediate risk of insolvency due to high cash reserves, which, however, were being eroded by the negative cash flow. The company's main concern therefore was to improve the process and find solutions to stem the financial difficulties that would eventually arise from the net cash outflow. The recommended actions included short and medium term measures. The short-term measures had already begun to show their results before the crisis: The textile company successfully reversed its negative net cash flow and turned it into a positive net cash flow worth 5 per cent of operational cash outflow. After having implemented an integrated planning system with rolling forecasts and centralized purchasing activities for a year, the company was able to predict its cash flow for a period of six months, though the global crisis has again reduced that from two to three months. The three most effective measures were the following ones: eliminating slow-moving inventories through sales and promotions, closing down units that were unprofitable or generated little cash, and implementing effective cash management by, among other things, renegotiating payment terms with suppliers and customers.

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Legal updates

25 Februarie 2010 Legislative Summary - January 2010 19 Februarie 2010 Certification of annual profits tax returns 5 Februarie 2010 State Budget and State Social Security Budget for 2010 Laws 5 Februarie 2010 Changes brought to certain VAT statements 5 Februarie 2010 Draft amendments to the Fiscal Procedure Code 29 Ianuarie 2010 Certification of the annual tax returns by a tax consultant 29 Ianuarie 2010 Fiscal regime for micro-enterprises

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