In our first article this year, we delved into the factors that will contribute to distress of companies in 2024 and concluded that despite the unpredictable nature of 2023, one thing remains certain: currency fluctuations, interest rate, and inflation risks will continue to loom large over businesses.
In this article, we explore strategies that can help companies not just survive, but thrive through the stormy business landscape by mitigating the impact of various risks and developing robust contingency plans.
While many directors may be accustomed to taking risks in pursuit of high rewards, for distressed companies, the current climate calls for a shift towards a more conservative approach focused on predictable growth and profitability. A risky move that fails to pay off could strain limited resources or, worse yet, lead to insolvency.
Struggling entities should also aim to generate and maintain cash flows. Accelerating accounts receivable collections is one critical step. Extending the timeline for settling accounts payable is another crucial measure. Additionally, divesting non-essential assets is essential. These actions collectively ensure liquidity, enabling a company to meet its financial obligations promptly as they arise. However, implementing these measures must be coupled with a rigorous assessment of overhead costs, labor expenses, procurement outlays, and non-essential expenditures to reduce costs.
Operational restructuring is another critical aspect, necessitating a re-evaluation of operational frameworks to streamline decision-making, flattening hierarchies, and realigning reporting structures. Enhancing customer engagement and diversifying asset portfolios can also fortify a company’s resilience in the face of adversity. In addition, addressing immediate vulnerabilities to the business and implementing strategic restructuring measures become essential. For instance, heavy reliance on a single customer or supplier facing its challenges could significantly impact the company’s stability. Mitigating such a risk would involve diversifying the customer base or securing alternative suppliers to alleviate potential ripple effects.
Effective communication and engagement with employees and stakeholders cannot be overstated when implementing cost-cutting measures and operational restructuring. Securing buy-in, mitigating resistance, and fostering a culture of collaboration are vital for organizational cohesion and resilience to strengthen liquidity and preserve cash reserves.
A robust hedging policy is also indispensable for absorbing shocks from volatile markets. Companies can leverage financial derivatives to manage macroeconomic risks effectively. For example, futures contracts can be strategic, for manufacturing companies that import products, as they offer a means to lock in prices or rates at predetermined levels, providing certainty and stability. Swap contracts can enable companies to convert floating interest rate liabilities into fixed-rate obligations, shielding them against adverse interest rate adjustments.
Finally, it is imperative to re-evaluate a distressed organization’s corporate governance mechanisms. Swift and decisive actions are necessary to rectify lapses in decision-making, risk management, financial governance, and strategic planning. Should a distressed company neglect this facet it condemns itself to a bleak future, as effective support from the board and management is crucial for turning around a troubled business.
The road to the stability of a distressed company is arduous; however, a consistently proactive approach, conducting impact assessments, and integrating compliance considerations to ensure that the management of risks remains effective can chart a course toward resilience and prosperity.
Navigating the turbulent seas of Kenya’s business landscape demands agility and strategic foresight. Companies can emerge stronger from distress by embracing good corporate governance practices, well-thought-out growth strategies, bolstering cash flows, optimizing operations, and hedging against financial and operational risks.
For a comprehensive business review or additional restructuring information, please reach us at litigationlawyers@gvalawfirm.com or francism@kestrelcapital.com
