Research for successful turnaround strategies clearly indicates that operational restructurings have the highest impact

Nieuwegein, May 2018

 

Key findings

In close cooperation with the University of Twente (coordinated by Nicolaas Beute), Beaufort has conducted an inquiry to identify successful turnaround strategies for organisations facing financial distress.

The findings clearly indicate that retrenchment measures in the broadest sense (cost reductions and working capital optimisation) by far have the highest impact on successful recovery processes when dealing with financial distress. This requires timely and decisive interference, in many cases accompanied by tough and emotional decisions. However, these firm measures are almost always inevitable to secure solid and profitable future operations.

 

Scope of the research

Since the start of this millennium, the world has experienced two large financial crises that had a major effect on the financial situation of innumerable organisations. For entrepreneurs and companies this has not only raised the question how to avoid financial distress, but also how to deflect financial problems after being affected by such crises.

The two most essential steps to overcome financial distress are the retrenchment response and the recovery response. While the retrenchment response emphasises on measures that influence cash flows on short term, the recovery response is aimed at a stable future situation, amongst others by the implementation of a new defined long term corporate strategy.

Since the retrenchment stage is crucial to overcome the distressed situation at all, and to be able to ‘buy time’, the research was mainly focused on this topic. Based on previous studies, various measures have been listed in a framework of three identified clusters of turnaround strategies: Operational restructuring, asset restructuring, and financial restructuring.

Operational restructuring comprehends measures that are directly related to the primary process of an organisation and are implemented in order to increase the organisation’s efficiency and to generate liquidities on short term. Asset restructuring is focused on adapting the (excess) asset portfolio of a firm in order to accomplish liquidity on short to mid term. Finally, financial restructuring aims to improve the organisation’s capital structure.

 

Research methodology and empirical results

Out of an extensive database of European companies, a sample has been generated of companies facing financial distress. Subsequently the effect of the implemented measures has been related statistically to the improvement of the individual companies’ state of financial distress over a time frame of 4 years. The measures included amongst others a reduction of the operational cost base, working capital improvement, divestment of excess assets, and renegotiating the existing credit lines. The state of financial distress has been measured by applying Altman’s Z-score, since the Z-score has proven to be a sound methodology for measuring companies’ financial distress as it incorporates all of its main determinants (profitability, solvency, liquidity, and leverage).

The results clearly indicate that operational restructuring by far has the most positive effect on the financial state of an organisation. This outcome is not surprising, since the associated measures effectuate structural changes related to the company’s primary process. This includes amongst others operational cost base improvement by workforce reduction. Another important measure concerns working capital optimisation (for example through the management of inventory, debtor, and creditor levels). Although asset restructuring and financial restructuring contribute to the improvement of a company’s state of financial health too, the main focus should be operational restructuring to accomplish the best results.

 

Practical relevance

The findings of the empirical study seamlessly coincide with the daily practice we at Beaufort experience during real life restructuring cases. Our approach is principally focused on identifying and implementing measures related to the primary process of a company, to ensure liquidity improvement on short term. Subsequently choices are made regarding the company’s strategy and capital structure to secure solid and profitable future operations.

If you have any question regarding this press release or the performed study, or if you would like Beaufort to assist you and your organisation in a restructuring situation, please do not hesitate to contact Michiel Tempelman or Jan Janssen.

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