Simple restructuring tips during recession
Monday April 26 2021
By CATHY MPUTHIA
- During this time of economic recession, businesses need every sound financial management strategies to survive.
- Covid restrictions and the economic recession necessitate some businesses to undergo some forms of restructuring to survive.
- Corporate restructuring involves a major shift in capital structure and operations especially during tough seasons.
During this time of economic recession, businesses need every sound financial management strategies to survive.
Covid restrictions and the economic recession necessitate some businesses to undergo some forms of restructuring to survive. Corporate restructuring involves a major shift in capital structure and operations especially during tough seasons.
In this column, I will suggest the simpler methods of restructuring which are within the reach of many businesses. The tips suggested are practical, simple and are short term in nature.
To survive a change in an external environment, a business has to undergo internal changes to survive. The animal kingdom can offer a few lessons for businesses during this period. Animals have various ways of surviving through harsh climatic changes. Some may opt to hibernate while others immigrate to regions with a more favourable climate. Therefore one of the major things a business’s needs to do during a restructuring period is adopt a change in strategy.
The strategic plan ought to be reviewed. One strategic malpractice I have observed in this season is implementation of unsuitable old strategic plans despite changes in the business environment. This is a rigid mindset that can be fatal to a business. If the old plan doesn’t fit, it is fine to discard it and start afresh. It is important to critically assess the changed business environment and adapt to it.
Covid-19 provided businesses with threats but also opportunities. For example, a company in the cosmetic manufacturing industry was able to shift strategy and manufacture sanitisers in response to the change. This company probably earned more revenue than it did in previous years due to quick restructuring.
Another way a business can restructure short-term is through the use of a financial model known as asset sale and leaseback.
Asset sale and leaseback
Under this model, the business sales off excess assets to third parties and immediately leases back the same from the buyer. The business will benefit from additional capital injection from the sale of the asset. It will also not loose utility of the asset as it continues to enjoy use through leasing.
This model comes with a further advantage of tax reduction as rental payments are tax deductible. The buyer in an asset sale and leaseback benefits too as he purchases the asset at below market price and also earns a fixed income from the rent paid. An example is a business that sells its car to a buyer and enters into an arrangement of hiring the same.
A second way to cut costs while earning a fixed income, is through sub-letting your business premises. Many businesses have had to surrender their leases due to inability to pay rent. This does not have to be the case if you get into a sub-leasing model. Under this model, your business can lease out excess office space to third parties in exchange for rent payments.
Your business retains the original lease arrangement with the head landlord and continues to service rent payments to the head landlord.
Your business, however earns rental from sub-letting the same premises to third parties. This may lead to reduced rent obligations to the head landlord and if structured well, increased profits from rental income.
Sub-letting presents businesses and the sub-tenants with a win-win solution. You earn income from the arrangement while the sub-tenant is able to afford cheaper office space.
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