Operational vs Financial Restructuring: Understanding the difference and why it matters
In times of distress or transformation, businesses often turn to restructuring to restore viability and preserve value. However, not all restructures are the same. Two key forms—operational and financial restructuring—address different but often interconnected challenges.
Understanding the distinction is critical for identifying the right strategy at the right time.
Financial Restructuring: Fixing the capital structure
Purpose:
Financial restructuring focuses on a company’s balance sheet—specifically, how it is funded and how it manages its financial obligations.
Common triggers
- Unsustainable debt levels
- Liquidity crises
- Breach of financial covenants
- Imminent insolvency
Key strategies:
- Renegotiating debt terms (e.g. interest, maturity, repayment structure)
- Converting debt to equity
- Raising new capital (debt or equity)
- Asset sales to reduce leverage
- Formal insolvency processes (e.g. voluntary administration, schemes of arrangement, small business restructures)
- Informal insolvency processes (e.g safe harbour, business reviews)
Goal:
To stabilise the financial foundation and restore solvency, often by sharing the pain across financiers and stakeholders.
Operational Restructuring: Fixing the business model
Purpose:
Operational restructuring targets the underlying performance of the business—how it functions, how it serves customers, and how efficiently it operates.
Common triggers:
- Declining profitability
- Inefficient cost base
- Poor customer satisfaction
- Redundant or bloated operations
Key strategies:
- Downsizing or reconfiguring operations
- Closing underperforming divisions or locations
- Supply chain and procurement improvements
- Management and workforce changes
- Business process reengineering
- Focused investment in profitable core areas
Goal:
To improve performance and competitiveness by reducing costs, increasing productivity, and aligning operations with market demand.
Why The Distinction Matters
- A business with solid operations but an overleveraged balance sheet may only need financial restructuring.
- A profitable-looking business haemorrhaging cash due to inefficiencies likely needs operational restructuring—or both.
- Misdiagnosing the root cause wastes time, resources, and can lead to collapse.
In many cases, both types of restructuring are required in tandem. Financial stability buys time, but sustainable success comes from fixing the operations that drive long-term value.
As restructuring advisors, our role is to diagnose the issues objectively, engage stakeholders constructively, and deliver a clear, actionable path to recovery. Whether navigating covenant breaches or overhauling underperforming divisions, the right mix of financial and operational levers will determine whether a company survives—or thrives.
