In order to have a lasting, i.e. sustainable effect, restructuring and reorganization must go beyond measures to improve operational performance and create a stable foundation of strategic success factors and optimized balance sheet ratios.
1. Take restructuring seriously
If a company does not continuously work on its strategic success factors, it loses the ability to maintain or increase its success in the future. We speak of a strategic crisis. If no measures are taken to overcome the strategic crisis, the next stage of the crisis develops: due to the decreasing effectiveness of the strategic success factors, sales and therefore results decline: the results crisis stage is reached. If no or inadequate countermeasures are taken at this stage, further declining results lead to increased liquidity pressure: the company enters a liquidity crisis. If it is not possible to obtain sufficient liquidity for the company either from current business or from external sources, the end result of this development is insolvency, usually due to inability to pay, often also due to over-indebtedness.
In the course of this downturn, the company finds itself in a situation that threatens its existence and which affects customers, suppliers, employees, social insurance providers and the tax authorities to a considerable extent. In order to avoid or at least limit the feared human and economic losses, decisive countermeasures must be taken. Restructuring must not be carried out with a light hand. A restructuring manager must know what his responsibilities are.
2. Securing liquidity
The primary activity in any restructuring project is to continuously monitor and secure the company's liquidity. If you use the frequently used comparison with open heart surgery, then liquidity can be equated with the urgently needed supply of oxygen.
There is no alternative to daily monitoring of account balances, outgoing payments and incoming payments. If in doubt, it is essential to maintain this monitoring in the longer term in order to have the necessary security throughout the entire restructuring process.
When it comes to securing liquidity, a guiding principle has proven itself that makes many financial experts' hair stand on end: "When in doubt, liquidity comes before profitability". If we consider that a company can very well exist for several years without returns, but only three weeks without liquidity, it becomes clear where our main focus must lie in the phase when the company's existence is threatened. But be careful: if it is not possible to provide the company with sufficient liquidity even by selling items below cost, you may end up with homemade over-indebtedness in addition to insolvency!
If the company has to make do with tight credit lines, increases in inventory should only be permitted to the extent that incoming payments from current business can be expected in the short term. If incoming orders and sales collapse over a foreseeable longer period of time, inventories must be drastically reduced, as otherwise there will be a lack of funds for essential payments such as wages and salaries. Inventories are also a decisive assessment criterion from the banks' point of view:
- if cost prices fall, the RHB stocks serving as collateral are no longer valuable
- the question of the recoverability of finished goods also arises
- the need for value adjustments on the balance sheet date leads to book losses
- the above-mentioned effects lead to a further reduction in equity and thus to a further deterioration in creditworthiness
if the company makes extensive use of leasing and factoring as financing instruments, there is a lack of reserve positions in collateral and undrawn loans:
- a take-up of factoring leads to a line cut, a purchase stop leads to a liquidity crash
- additional negotiating partners make refinancing more difficult in the event of a moratorium
3. Regaining efficiency
The common thread of a company restructuring is the profit and loss account: All income and expense items must be scrutinized with regard to their necessity in terms of quantity, quality and intensity. The analysis begins with the company's business model, with items and their quantities and prices.
The realization that a turnaround will remain unsuccessful if customers do not continue to demand the company's services should not obscure the fact that success in the sales area takes significantly longer than cost-saving effects. In a detailed P&L, there are numerous areas for restructuring in the area of expenses/costs.
Detached from the common thread of the P&L, I consider some key areas of restructuring to be of outstanding importance, which will therefore be explained below.
One of these key areas - and usually also the most important - in restructuring is the analysis of the product and service portfolio in terms of sales and earnings and thus in terms of the contribution to earnings per item and service.
This is used to derive the loss per item/service, the overall loss incurred by the loss-makers and which cross-subsidization - consciously or unconsciously - has concealed the imbalance in the overall result in the past.
In a second step, the options for action available to the company are compiled:
- Switch to more cost-effective materials
- Change to alternative manufacturing concepts
- Design change and/or process change
- Relocation to production partners (outsourcing)
- Search for procurement options
- Price increases
If none of the options described above lead to an acceptable return, the termination of the supply contract must ultimately be discussed. This can often only be arranged in connection with a one-off delivery of the remaining series requirements.
This does not make the item more profitable, but it eliminates further cost increases during the remaining term of the delivery obligations.
Often, the objection to a portfolio streamlining is that the company to be restructured would be "weakened" by the reduction in sales in a decisive phase. A weakening would rather be seen in foregoing earnings in favor of turnover, as turnover without earnings or with negative earnings reduces the value of the company and contributes to further reducing the equity of the restructuring company.
There is probably no restructuring case where it is not pointed out at a very early stage that it cannot be managed without significant staff reductions.
This advice regularly causes anxiety among the employees affected, generates an anti-restructuring stance on the part of the works council and prompts politicians from the relevant local authorities to take immediate action. However, is this agitation really justified?
In a proper and targeted restructuring process, the first step is to take stock of the situation, the results of which form the basis for the individual restructuring measures. This inventory is followed by an analysis of the restructuring company's business processes. The description of the business processes and the staffing levels tailored to the business volume together result in the company's target headcount.
As the strategic repositioning of the restructured company is also one of the necessary components of the restructuring, the target headcount must be reviewed with regard to the further planned development of the company: Where will we need how many employees in the future in order to realize the targeted growth?
A large reduction in personnel that is not justified by a factual analysis may be useful as a "threat" in a restructuring case, but this benefit is not long-lasting: in many cases, it even turns into damage, as good employees who are urgently needed for the new start leave the company and those who remain behind are not motivated, but paralyzed by fear.
While a cautious approach is more time-consuming than populist and high-profile "round-ups", in my experience, the overall success that can be achieved speaks for prudence. The more the information of those affected and the joint search for alternatives are anchored in the corporate culture, the better and more credible this will be.
In many companies, only a few costs are allocated directly to the individual items/business areas in line with their cause. The remaining costs, which are essentially fixed divisional or company costs, are allocated to the individual cost units through a series of allocations. These allocations must also be included in the costing of the items so that the prices for the market services also cover the fixed costs.
In the context of a reorganization, it is necessary to examine how your own items compare in terms of price with the competition. In these comparative analyses, it regularly becomes apparent that one reason for the company's declining attractiveness is that the price level is too high compared to the competition. In addition to production costs, this price level is also due to mark-ups resulting from cost allocations. Therefore, if the company does not want to forego the stabilization and improvement of the business volume during restructuring, the calculation rates - in this case the cost allocations - must be reduced in such a way that the prices can hold their own against the competition. This expressly does not apply to items that are marketed with a differentiation strategy, as they represent a special benefit for customers; however, such "add-value products" are rarely encountered during a restructuring.
If prices are reduced to the competitive level, the mark-ups are cut. However, in order for the reduced prices to cover the company's costs overall, not only must the sum of the surcharges be reduced, but the source of the surcharges, i.e. the fixed cost structure, must also be relieved. But what does this mean?
The company's planning, control and administrative apparatus must be put to the test with the aim of adapting the company's fixed costs to market conditions. Only this approach closes the loop that prevents uncovered fixed costs from reducing the company's earnings.
4. Restore unique selling points
To ensure that the effect of a turnaround is not exhausted by merely delaying the end of the company, a sustainable turnaround includes a review of the strategic success factors and, if necessary, a strategic repositioning.
The first step is to analyze and update the company's vision and mission statement. The analysis includes the company itself, its environment, its customers and its competitors. An essential part of this analysis is the regular question of the future dimension of the company. This determines which core competencies the company can develop and to what extent. In many cases, this analysis means that a vision and mission statement must first be developed together with the managers: Without this long-term orientation, the restructuring lacks direction and impact.
From the vision and mission statement, goals, strategies and measures can be derived with which the company is to be further developed. The goals reflect the long-term orientation, the strategies serve as paths to these goals, while the measures represent the individual steps on these paths. The objectives must be developed in a system for the company that is collision-free and complementary, the strategies must take into account the strengths, weaknesses, opportunities and risks of the company and, above all, the measures must not overstretch the available resources.
The implementation of the measures leads to the external and internal development of unique selling points with the following "side effects":
- Concentration of strengths
- Building on strengths/utilizing opportunities
- Targeted innovation
- Balance between goals and resources
- Creating a fit-for-purpose organization
5. Financing assets in a balanced way
One of the key functions of a future-proof reorganization lies in preventive measures to avoid a repeat of the crisis that has just been overcome. Here, the focus is on activities in the balance sheet or on an approach to ongoing business that is best described by the actions of the prudent businessman.
My son, bey mit Lust bey den Geschäften am Tag, aber machen nur solche, dass wir bey Nacht ruhig schlafen können!
(Thomas Mann "Buddenbrooks", Unabridged edition, published by Fischer Taschenbuch Verlag Frankfurt/M., 50. (Thomas Mann "Buddenbrooks", unabridged edition, published by Fischer Taschenbuch Verlag, Frankfurt/Main, November 2001, p. 174)
The highest priority is to avoid insolvency and over-indebtedness in the long term, which is ensured by continuous liquidity management, a planning system based on liquidity and profitability and continuous value retention and value enhancement management.
Another objective in the balance sheet is to achieve a long-term return on capital at an acceptable level that takes into account the desired equity/debt ratio. The tasks here are to optimize the equity ratio, define and implement a practicable size of the group of house banks and, together with the capital providers, make sensible use of the leverage effect.
