Facing the imperative to restructure

Facing the imperative to restructure

Companies looking to improve their bottom line or restructure have more options than ever; it’s standing still that can be the problem.

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Swirl of Barracuda fish

Restructuring is likely to become the new norm over the next 3 years – whether your company is distressed or not.

According to KPMG’s 2017 Evolving Deals Landscape survey, more than one third (34 percent) of Australian companies are looking to implement specific performance improvements, restructuring or turnaround initiatives in the next 3 years. For larger companies, it’s even more likely, with the response rate jumping to almost one half (48 percent).

There has been a distinct shift in the restructuring market, says KPMG’s Head of Restructuring Services, Matthew Woods. In large part, this is the result of changes in how potentially insolvent companies are viewed and treated. Opting to turnaround or restructure a company – sooner rather than later – is on the rise.

There are also companies that are far from distressed considering turnaround strategies. For a growing number of these businesses, restructuring is an opportunity to ensure they extract every dollar from their operations in response to increasing economic and financial pressures.

Safe to fail

For companies that have fallen on hard times, there are more reasons than ever to face reality and take a proactive approach.

First and foremost are the Federal Government’s draft insolvency laws, which help to protect directors from liability for insolvent trading. “The new safe harbour laws aim to encourage and support directors through the viable restructuring and turnaround of their businesses,” Woods says.

Another element is Australia’s low interest rate environment. “Banks are more willing to support a viable restructure because of the low interest rates. They can afford to defer, extend or restructure the debt.”

There is also the fact that banks continue to feel pressure from both sides of government, says Woods, which means they are more likely to allow companies time to work through their challenges.

Preparing for the worst – and the best

It is not only distressed companies that are finding reasons to reformulate their fortunes. Vince Dimasi, KPMG’s Australian Lead for Working Capital Advisory, echoes the survey’s findings: “In Australia over the past 12 months we’ve seen a significant increase in interest from clients looking to get their house in order regarding how they manage their operational practices relating to working capital (receivables, payables and inventory).”

Woods says this is not surprising. “It’s what you find in an economy which has been strong but is coming under stress. Businesses need to reset their cost base and restructure to ensure they are resilient going forward.”

Of businesses planning restructuring initiatives in the next 3 years, about two thirds are focusing on active cost reduction (67 percent) while almost two thirds will more closely manage or monitor cash flows (65 percent), according to the survey.

In fact, Dimasi sees a shift occurring here. “Over the past decade, cost reduction and cost out programs have been flavour of the month. But we’re now seeing a gradual shift towards a focus on cash and working capital improvements.”

Dimasi says companies across the board are increasingly interested in how they can improve their cash and working capital performance – whether they’re in distress or not – saying, the trend “will continue for at least the next few years”.

Courting cash flow

Dimasi is also seeing further changes as to exactly how clients are driving cash and working capital improvement. For instance, he noticed working capital improvement programs were largely focused on a just a few improvement levers 5 or 6 years ago, whereas today, more astute clients have many more improvement levers in play.

“In one of my current working capital improvement programmes for a client, we are actively managing in excess of 50 different improvement strategies. For companies looking to optimise their cash and working capital performance, it’s very much a matter of leaving no stone unturned. That’s the mindset of the more astute and proactive clients around cash and working capital, and it definitely delivers results.”

With many companies considering refresh measures, it’s imperative to consider following suit. For many CFO’s and Treasurer’s in today’s environment, improving working capital performance is high on their radar. “If you are not actively doing that right now, then standing still is very much moving backwards. Whether you notice or not, there’s a high chance that your suppliers and customers are optimising their working capital at your expense,” says Woods.

The struggling sectors

Some companies are genuinely struggling with cash flow of any kind, most notably those in the energy, resources and retail sectors, Woods says.

“The energy and natural resources sectors are still trying to reset their balance sheets after the mining boom. It’s not just the producers; there’s significant stress across the services industry as well. Mining services businesses that grew significantly are now under pressure with large debt loads, reduced margins and shrinking opportunities for revenue to deliver their balance sheet. If equity is not available to them because of the earnings pressure, then a key focus is optimising the working capital they have for debt reduction.”

The retail industry is facing similar challenges. “Obviously we’re seeing significant stress in retail coupled with insolvency appointments,” Woods says. “That started with Dick Smith and continued recently with the administration of Topshop. So there’s a focus around inventory management, top line and margin preservation.”

A holistic approach to technical solutions

For many companies, however, it’s about improving profitability. The survey shows that a large portion of the companies that are undergoing a performance improvement, restructure or turnaround are actively implementing cost-saving initiatives to improve profitability (87 percent), while 60 percent are turning to productivity improvement programs and more than half to new technology solutions (56 percent).

Dimasi points out that any such improvements should be based on an understanding of what you can control by focusing on what is internal to your business. To both Woods and Dimasi, technology is a vitally important to achieve these measures.

In fact, companies don’t have a choice, says Woods. “Technology is moving so fast that companies that aren’t looking to implement a solution will be left behind in terms of efficiency, profitability and ability to compete.”

That doesn’t mean companies should jump at the latest technological solution though, Dimasi says. “That’s a hidden trap for many CFOs. They often underestimate the integration challenges of a new solution or product, and as a result they save money at one end of the equation but lose it at the other end.”

KPMG's restructuring an turnaround specialists can show companies how to rapidly identify and prioritise, practical profitability improvement initiatives that align with their strategic and operational objectives and help build leaner, more flexible and more competitive companies.

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