Debt Restructuring Plan

If it is determined that your company is carrying excessive debt, it is important to take action quickly. A debt retirement and restructuring plan is in order. In this way the balance sheet can be strengthened so that when downturns in business occur or opportunities arise, lending sources are available.

This plan should be based on realistic budget forecasts and cash flow projections. It should also include an analysis of how the debt problem developed and how to avoid repeating it. This plan demands a realistic assessment of your company, its products or services, and the discipline to carry it out.

Once completed, it may prove of value when negotiating with lenders and others that need to be involved in a restructuring. Upon implementation of a restructuring plan, progress should be monitored by periodically measuring liquidity and solvency ratios and tracking changes as they occur. Some additional financial metrics that can help are:

Working capital is a measure of whether enough current assets exist to cover current liabilities.

While an increasing trend in working capital is generally a favorable thing, it may also indicate growth in non-cash current assets such as inventory or accounts receivable, which may be due to poor asset management performance. As with all financial analysis, once a trend is discovered, it should be investigated to determine the underlying cause and action taken if necessary.

working capital

Calculate your company’s working capital:

Working Capital Calculator

Description Your Input
Current Assets
Current Liabilities
Working Capital Calculations

Enter only numeric values (no commas), using decimal points where needed.
Non-numeric values will cause errors.

Another useful ratio is Days of Cost of Goods Sold in Inventory

days of cost of goods sold in inventory

Days of Cost of Goods Sold in Inventory measures efficiency of inventory management and capital tied up in unsold inventory, possibly at risk of losing value over time.

Lower values can indicate faster turnaround of product, better timing of inventory purchases, and generally less capital tied up in inventory, and therefore available to fund operations or pay down debt. Looking at trends in this ratio can highlight problems as they arise, however, this ratio should be used carefully in rapidly growing firms, as increasing inventory may indicate favorable increases in a new product or new market development.

Here is a tool for you to calculate this ratio:

Days COGS in Inventory (DCOGSI) Calculator

Description Your Input
Monthly Cost of Goods Sold
DCOGSI Calculations

Enter only numeric values (no commas), using decimal points where needed.
Non-numeric values will cause errors.

There are many approaches to restructuring business debt and increasing long-term solvency. Here are some suggestions:

  1. Cut all additional borrowing
  2. Negotiate with lenders for better rates and terms
  3. Pay off debt with private funds
  4. Investigate debt consolidation
  5. Renegotiate terms and conditions of debt covenants or conditions, i.e., use of accounting reviews or compilations instead of costly full audits to fulfill reporting requirements
  6. Negotiate extended payment terms with major suppliers
  7. Consider sale/leaseback of fixed assets where appropriate
  8. Accelerate payments on accounts receivable or consider factoring A/R
  9. Consider using personal guarantees of principals to renegotiate terms of loans
  10. Use additional investment from current owners to pay the debt, enhance D/E ratio, increase solvency
  11. Liquidate unused or obsolete assets, write off uncollectable bad debt accounts receivable, clean up the balance sheet
  12. Bring in outside debt consultants

The idea is to pay down debt as quickly as possible without sacrificing operations and bottom line.

Some tips on maintaining a strong balance sheet through effective debt management:

  1. Anticipate working capital shortages and other funding requirements by developing realistic budgets and cash flow projections based on those budgets. Revise periodically.
  2. Establish a good relationship with your bank or lender, preferably one that understands your industry.
  3. Address problems with lenders immediately to avoid surprises
  4. Negotiate better rates and terms with lenders
  5. Never borrow to finance operating deficits
  6. Match debt service outflows with cash flow generated by financed investments
  7. Don’t borrow unless proceeds will contribute to company goals and profitability
  8. Know your prospective lenders and analyze your financials the way they do
  9. Finance short-term assets with short-term debt, and vice versa.
  10. Use credit cards only for very short term credit and pay off fully each month – never run balances
  11. Pay off debt methodically, with a plan, focusing on those with the highest debt service costs, i.e., interest

Author: Marc J Marin

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