The September 2021 report by the Bank of Uganda on the “State of the Economy” tells us that “measures to curb the re-surgence of the COVID-19 pandemic have dampened the growth momentum of the economy” and the economy is now predicted to “grow at about 3.5-4.0% down from the 4.0-4.5% as earlier predicted in June 2021”.
In other words, the economy is not in good shape. Therefore, if you have been dreaming of a large Christmas, holiday or new car, let that remain a dream – for now. You should instead focus on exercising prudence despite the temptations of the holiday season. Now is an opportunity for you to consider restructuring your business to respond to changes in the marketplace and increased or reduced product or service demand.
Restructuring refers to a situation where a business makes significant changes to its financial position or operations, typically while under financial pressure. This helps to manage or avoid financial distress and ensure the long term resilience of the business.
Financial restructuring involves reorganizing the business’ capital to make it sustainable. For example, if your business is highly indebted, you can request your bank to change the terms of the existing loans for example by increasing the period of the loan. At the start of the pandemic, the Bank of Uganda introduced COVID-9 relief measures that allowed banks to suspend the collection of debt from businesses affected by the pandemic. Several businesses took advantage of this opportunity to restructure their loans.
Financial restructuring may also involve the sale of assets that are not important to the business such as equipment or real estate property that is no longer in use. This helps to raise finances that can be injected back into the business and provide the much needed capital to finance its activities.
Operational restructuring focuses on how a business is managed with a view of improving its performance. Signs of underperformance include; declining revenues, increasing expenditure, slow response to market changes and working capital constraints.
Laying off workers to reduce the wage bill is a form of operational restructuring aimed at reducing costs. Addressing poor management by fixing corporate governance is another measure that has been used especially by family-run businesses. This can be done by involving professionals to run the business instead of relying on family members as well as putting into place systems and procedures such as separating the business’s finances from the personal.
Working capital constraints can be managed by making use of cashflow forecasting and planning especially for SMEs that generally lack the discipline. Forecasting which includes estimating future sales and expenses will tell you whether the business has enough cash to operate, how long it takes to generate cash and identify any cash leakage.
Broadening supply chains is another way of achieving operational efficiencies. For example; businesses that solely relied on China for supplies were forced to find alternative suppliers or risk closing when the country closed its borders. Today, such businesses are purchasing online, locally or from other countries.
Renegotiating supplier contracts and payment terms can free up working capital. For example, if you have a 3 year rental agreement that requires you to pay rent every 3 months, you can discuss with the landlord the possibility of a discount or paying monthly.
Often, a combination of both financial and operational restructuring may be required as focusing on one option may be temporary. If you focus on the financial aspects without addressing poor performance or management, it may simply buy a bit of time before the symptoms reappear.
Ultimately, it is important to tackle the situation early to avoid continuing towards total business failure.
Crystal Kabajwara is an Associate Director with PwC Uganda’s tax practice.