The Corporate Restructuring Model

The Corporate Restructuring Model (CRM) was developed under the USAID Financial Restructuring Project with the idea that it will serve as a basic tool for enterprises facing problems and attempting to restructure under the auspices of the new Bankruptcy Law of Ukraine.

Our primary focus has been to stress the idea of debtor-led reorganization, which means that the debtor puts forth a reorganization plan with the approval of at least 51% of its creditors. Upon approval of the reorganization plan (known as a sanation plan), the debtor’s management under guidance and approval from creditors and the bankruptcy courts attempts to lead its own business back to financial viability.

One of the key tools to develop an enterprise restructuring plan and to assess its viability is the CRM. The purpose of the model is to take a potentially profitable company facing financial difficulties and to allow the managers to use the model to show how and when the enterprise can become profitable again. We anticipate fully that the outputs of the model will be used as documentation to support the sanation plan to be presented to creditors and the court. The model is run on an Excel spreadsheet for ease of use. To give some idea of what the CRM could accomplish, we list the following types of managerial actions which can be supported by use of the model:

• Cut fixed costs

• Cut variable costs

• Use productive assets more efficiently

• Acquire new equipment

• Improve products

• Focus on profitable market segments

The CRM helps develop a restructuring plan for potentially viable enterprises, to help convince creditors that continuation of the business is a financially more attractive alternative to liquidation!

The target audience for this manual, is of course, user of the CRM: insolvency practitioner. The model is created as Excel spreadsheet software. We selected Microsoft Excel because it is commonly used and is part of the Microsoft Windows package, which is installed on 9 out of 10 computers. Many people find it easy to use, so they will not need to learn any special software.

The original purpose of creating Microsoft Excel was to facilitate so called "What-If Analysis" or dynamic analysis, which means that the user can specify some assumptions (input cells), then write some formulas that make some intermediate calculations of the source data. And finally, it allows having some resulting values, which can be organized in some presentational format and can be printed as reports. Actually, when you start using Excel, you don’t need a calculator any more because Excel does the calculations for you if you provide the source data and formulas to perform the calculation. You should never independently add or subtract numbers and type in the result! Moreover, this is strongly NOT recommended, because if you change any of the source values, and do not make the corresponding change in the result cell, your sheet will become inconsistent! Instead of this you should use formulas for all calculations, and you will really enjoy the power of Excel.

So, what does "What-If Analysis" mean? When making say a business plan, you should simply change your assumptions, and Excel automatically recalculates all dependent cells: you can see the results immediately. If you don’t like them, just change the assumptions and see what happens. After a number of trials, you can select the best option, and not even touch a calculator!

The CRM follows a logical structure and set of processes, which are conventional in any corporate restructuring and analysis model. The model structure is based on defining and forecasting the three core business activities of an enterprise: operations, investment and financing.

Because the intent is to use the model in Ukraine, we have tried to develop it in a way, which caters to Ukrainian specialists

• We have adopted Ukrainian Balance Sheet Format with translation into to a format similar to International Accounting Standards

• There is a special section containing Financial Ratios established by the Agency for Bankruptcy in addition to conventional international ratios

• We have listed the most common Ukrainian taxes with adjustable rates, and provide extra space for new ones that may appear later

• The CRM accommodates both Ukrainian and English language using a simple switch; this saves time for translation if the results are to be shown to potential investors or foreign creditors

Some key elements of flexibility and sensitivity in the model include:

• Sales and purchases breakdown between different market segments: domestic and foreign, cash and barter

• Prices for products and inputs can be pegged either to UAH or to USD, and the latter ones will be automatically adjusted according to the exchange rate forecast

• It is possible to make three scenarios for each assumption: baseline, optimistic and pessimistic, so that the user can have not just only one resulting figure, but be able to examine the most probable range of possible values, and test the impact of each assumption on cash flows

We have tried to make the model user-friendly:

• Worksheets are structured according to sequence of use – from left to right, and from top to bottom

• CRM is automatic to the extent possible – it minimizes keyed data needed from the user. For example, all product names, workshops names and cost item names are typed only once, and they then appear in the same way in all subsequent places where they are needed

• We use color coding to indicate data entry areas for ease of use by operators

The model consists of about 20 separate worksheets. Some of them have up to 1000 lines of data, others have up to 50 lines. There are also some charts that facilitate interpretation of results. The basic consideration taken into account when breaking down the components of the model was that data having similar structure and requiring a sequential set of calculations were grouped and placed in the same worksheet.

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