Definition
Restructuring cost is a one-time expense that a company incurs when making drastic changes to its business to increase efficiency and boost profitability. This can include costs associated with layoffs, relocating offices, closing factories, or changing its business strategy. It is generally considered as an exceptional cost and is often reported separately in a company’s income statement.
Key Takeaways
- Restructuring Cost refers to the one-time expenses or the ongoing costs that a business incurs when reorganizing its operations. These costs are recorded under “restructuring charges” and can heavily impact a company’s financial statement.
- Restructuring costs may include severance pay for employees who are laid off, costs associated with closing facilities or moving to a new location, asset write-downs, or costs associated with cancelling contracts.
- While restructuring costs could be detrimental to businesses in the short run, they are often incurred with the goal of improving operational efficiency, boosting profitability, or pivoting the business in a new direction over the long term.
Importance
Restructuring cost is an important concept in finance because it directly impacts a company’s financial health and future growth strategy.
This cost refers to the one-time expenditure or charges a company incurs when it reorganizes its business operations or structure with an aim to boost its overall profitability or efficiency.
These costs may include severance pay for laid-off workers, costs of retraining remaining employees, expenses of moving a plant or equipment, or costs related to breaking leases.
Businesses taking on restructuring often endure short-term financial pain for long-term gains.
The significance lies in the fact that these costs can significantly impact a company’s earnings, balance sheet, and cash flow, thus they are closely monitored by investors and analysts to gauge the potential financial risks and rewards of the restructuring process.
Explanation
Restructuring cost refers to expenses that a corporation incurs when it makes significant changes to its business operations or structure. These costs can arise from various scenarios such as mergers and acquisitions, downsizing, or shifting to a completely new line of business.
The purpose of incurring restructuring costs is often to improve the company’s long-term profitability, competitiveness, or to adapt to a new market environment. While restructuring costs might imply a financial burden in the short-term, they are used to achieve a more effective operational structure, cost efficiency, or better strategic position in the long term.
This could involve costs related to employees, such as severance payouts and retraining, or operational changes like costs to close facilities, relocate resources, or writing off old technologies. Restructuring can ultimately lead to lower costs, higher profit margins, and a more sustainable business model, thus potentially rewarding stakeholders for enduring the initial drop in profitability or business disruption.
Examples of Restructuring Cost
**General Motors Restructuring:** In 2009, General Motors Corporation restructured to come out of bankruptcy. The restructuring costs included $
5 billion, written off as unsecured debt and equity. They also spent extensively on reducing the workforce, retooling plants, and streamline their operations. As a part of the process, the company had to close down plants, discontinue certain automobile models, and layoff thousands of employees.
**Hewlett-Packard (HP) Restructuring:** In 2012, as part of a long-term plan implemented by CEO, Meg Whitman, the company spent millions in restructuring costs to bring about a radical shift in their operating model. The plan included reducing around 29,000 positions worldwide, and incurred cost in training and severance packages and also in overhauling their Information Technology Systems.
**Barclays Bank Restructuring:** In 2013, Barclays Bank announced a major restructuring plan, including a reduction of 3,700 jobs and downsizing of its investment operations. The bank estimated the restructuring to cost about £
7 billion. This included costs associated to job losses, closure of operations, and overheads involved in streamlining the bank’s operations.
FAQs on Restructuring Cost
1. What is Restructuring Cost?
Restructuring cost refers to the one-time expenses or the ongoing charges that are incurred in the process of restructuring the financial, operational, or other aspects of a company during the business realignment or when trying to adapt to a new financial environment.
2. What are some examples of Restructuring Costs?
Examples of restructuring costs can include expenses for employee severance, pension changes, or early retirement incentives. Additional costs can include writing off old debts, selling or eliminating assets, or even contracting with third parties. The specific costs involved will differ from company to company based on their individual restructuring plans.
3. How are Restructuring Costs accounted for?
Restructuring costs are typically accounted for as liabilities on a company’s balance sheet. These costs are depicted as a separate line item because they’re considered unusual or rare — they’re not part of a company’s regular business operations. Generally, these costs must be both significant and associated with a formal plan to be rendered as restructuring costs.
4. How do Restructuring Costs impact a company’s financial health?
While restructuring costs can potentially burden a company with significant debt and may lead to short-term decrease in profitability, they are often a sign of a company’s efforts to streamline operations, boost efficiency, or improve overall long-term profitability. Therefore, while they can be costly in the short-term, these restructuring efforts often aim to make the company more financially healthy in the long run.
5. Can a company avoid incurring Restructuring Costs?
Restructuring costs can be avoided, but this usually implies a choice not to make substantial changes to the company’s business operations or strategy. If a company chooses to undergo restructuring, it’s generally because the long-term benefits of the changes are expected to outweigh the short-term restructuring costs.
Related Entrepreneurship Terms
- Capital Structure
- Debt Restructuring
- Corporate Restructuring
- Bankruptcy Cost
- Operational Restructuring
Sources for More Information
- Investopedia: Provides comprehensive insights about numerous finance terms including restructuring cost.
- Corporate Finance Institute (CFI): Offers detailed academic-style resources and professional training on various finance topics.
- AccountingTools: Provides a wide array of accounting and finance topics including detailed explanations, examples, and professional advice.
- The Balance: Gives expert insights on personal finance, making money, retirement planning, investing, real estate and more.
