Types of Corporate Restructuring
Corporate Restructuring entails a range of activities including financial restructuring and organization restructuring.
1. Financial Restructuring
Financial restructuring is the reorganization of the financial assets and liabilities of a corporation in order to create the most beneficial financial environment for the company. The process of financial restructuring is often associated with corporate restructuring, in that restructuring the general function and composition of the company is likely to impact the financial health of the corporation. When completed, this reordering of corporate assets and liabilities can help the company to remain competitive, even in a depressed economy.
Just about every business goes through a phase of financial restructuring at one time or another. In some cases, the process of restructuring takes place as a means of allocating resources for a new marketing campaign or the launch of a new product line. When this happens, the restructure is often viewed as a sign that the company is financially stable and has set goals for future growth and expansion.
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Need For Financial Restructuring
The process of financial restructuring may be undertaken as a means of eliminating waste from the operations of the company.
For example, the restructuring effort may find that two divisions or departments of the company perform related functions and in some cases duplicate efforts. Rather than continue to use financial resources to fund the operation of both departments, their efforts are combined. This helps to reduce costs without impairing the ability of the company to still achieve the same ends in a timely manner
In some cases, financial restructuring is a strategy that must take place in order for the company to continue operations. This is especially true when sales decline and the corporation no longer generates a consistent net profit. A financial restructuring may include a review of the costs associated with each sector of the business and identify ways to cut costs and increase the net profit. The restructuring may also call for the reduction or suspension of production facilities that are obsolete or currently produce goods that are not selling well and are scheduled to be phased out.
Financial restructuring also take place in response to a drop in sales, due to a sluggish economy or temporary concerns about the economy in general. When this happens, the corporation may need to reorder finances as a means of keeping the company operational through this rough time. Costs may be cut by combining divisions or departments, reassigning responsibilities and eliminating personnel, or scaling back production at various facilities owned by the company. With this type of corporate restructuring, the focus is on survival in a difficult market rather than on expanding the company to meet growing consumer demand.
All businesses must pay attention to matters of finance in order to remain operational and to also hopefully grow over time. From this perspective, financial restructuring can be seen as a tool that can ensure the corporation is making the most efficient use of available resources and thus generating the highest amount of net profit possible within the current set economic environment.
2. Organizational Restructuring
In organizational restructuring, the focus is on management and internal corporate governance structures. Organizational restructuring has become a very common practice amongst the firms in order to match the growing competition of the market. This makes the firms to change the organizational structure of the company for the betterment of the business.
Need For Organization Restructuring
- New skills and capabilities are needed to meet current or expected operational requirements.
- Accountability for results are not clearly communicated and measurable resulting in subjective and biased performance appraisals.
- Parts of the organization are significantly over or under staffed.
- Organizational communications are inconsistent, fragmented, and inefficient.
- Technology and/or innovation are creating changes in workflow and production processes.
- Significant staffing increases or decreases are contemplated.
- Personnel retention and turnover is a significant problem.
- Workforce productivity is stagnant or deteriorating.
- Morale is deteriorating.
Some of the most common features of organizational restructures are:
- Regrouping of business: This involves the firms regrouping their existing business into fewer business units. The management then handles theses lesser number of compact and strategic business units in an easier and better way that ensures the business to earn profit.
- Downsizing: Often companies may need to retrench the surplus manpower of the business. For that purpose offering voluntary retirement schemes (VRS) is the most useful tool taken by the firms for downsizing the business’s workforce.
- Decentralization: In order to enhance the organizational response to the developments in dynamic environment, the firms go for decentralization. This involves reducing the layers of management in the business so that the people at lower hierarchy are benefited.
- Outsourcing: Outsourcing is another measure of organizational restructuring that reduces the manpower and transfers the fixed costs of the company to variable costs.
- Enterprise Resource Planning: Enterprise resource planning is an integrated management information system that is enterprise-wide and computer-base. This management system enables the business management to understand any situation in faster and better way. The advancement of the information technology enhances the planning of a business.
- Business Process Re-Engineering: It involves redesigning the business process so that the business maximizes the operation and value added content of the business while minimizing everything else.
- Total Quality Management: The businesses now have started to realize that an outside certification for the quality of the product helps to get a good will in the market. Quality improvement is also necessary to improve the customer service and reduce the cost of the business.
The perspective of organizational restructuring may be different for the employees. When a company goes for the organizational restructuring, it often leads to reducing the manpower and hence meaning that people are losing their jobs. This may decrease the morale of employee in a large manner. Hence many firms provide strategies on career transitioning and outplacement support to their existing employees for an easy transition to their next job.