Business Growth can be Held Back Unless a Business Reviews its Structure

by Alison Withers

The structure of a business is the key to its success and often it can get in the way of growth.

An example is the lack of built-in capacity for growth. If a business needs to build another factory, say, then if the funding is not in place to do so that will get in the way of growth.

Frequently to correct this kind of issue a business needs restructuring to provide itself with the flexibility it needs to survive and grow.

Changing the business model is an essential part of corporate restructuring. It might be shifting from a fixed price model dependent on in-house capacity such as having a fleet of trucks for product distribution, to a flexible model by getting rid of the fleet and outsourcing distribution and delivery.

Ideally a regular look at the business structure would be part of the process of continuous improvement to ensure a business is in the best possible shape to meet short term problems, like an economic downturn and a consequent drop in orders, and to enable it to thrive, grow and expand long term.

Restructuring more often is carried out as a consequence of a business struggling to survive and is one of the tools available to business rescue advisers called in to help a company in difficulties.

An illustration of what a restructuring adviser can do is the case of a company with a break-even point of £3.5 million, whose turnover had dropped from £5 million to less than £2.5 million.

In this situation it was clear that, although viable, significant changes were needed. They included closing a factory, getting rid of onerous financial arrangements, terminating some employment contracts and reducing other fixed costs. The result of these actions was a reduction in the break-even point to £1.8 million.

A reduction of sales to just under £2.5 million then became a healthy profit rather than a significant loss.

A significant reduction in fixed overheads, by terminating fixed arrangements such as finance on equipment and buying the equipment instead, for example, was a result of these activities.

It also meant that the unit cost of production reduced once it was released from the burden of the financial drain on the equipment.

It could be that this should have been evident to those running the company but it is possible for people to be too intimately involved in running the business day to day, particularly udner this kind of stress, and therefore to be unable to stand back and look objectively at those elements of structure that are hindering a solution to the changed circumstances of the business.

The unexpected but fortunate effect of the restructuring was to lay foundations for future growth. Although improvement in margins made it easier to fund the increase in sales activity and supplies needed, more important was outsourcing some manufacturing capacity which made the company far more flexible.

Calling on the help and support of an outside business rescue adviser to look at the business model and identify where it can be radically altered without threatening the core viability of the company can make all the difference to a successful turnaround in the face of a reduced order book and potential serious liquidity problems.

About the Author

An objective review with a business turnaround adviser like Tony Groom, of K2 Business Rescue could help ensure that a company's structure is not holding back its growth, writes Ali Withers. http://www.rescue.co.uk

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