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Financial Distress
Financial distress is a condition where a company cannot meet or has difficulty paying off its financial obligation to its creditors. A situation where a firms operating cash flows are not sufficient to satisfy current obligations and the firm is forced to take corrective action. It can lead to bankruptcy sometimes. It may lead a firm to default on a contract, and it may involve financial restructuring between the firm, its creditors, and its equity investors
Characteristics
Unfavorable financial status. Costs overshoot revenues Inability to honour financial obligations. Threat of bankruptcy. Threatens companys image.
Lack of Liquidity
Mismanagement
Over/under diversification
Causes
Obsolescence Negligence
Impacts
Damaged Relationship
Demotivation of employees
Financial Restructuring
It means the balance in debt & equity funds to achieve reduction in Cost of capital To increase in EPS. To improve market value of share. To reduce the control of financiers on the mgmt of the company.
Conti.
It is an adjustment of debt-equity ratio to achieve maximization of wealth of share holder. It involves restructuring of assets & liabilities of the company, to promote efficiency, support growth & maximize value to share holder , creditors & other stakeholder. It means to reorganize the resources, strategies & assets.
1. Retrenchment
The highly diversified firm may be divested & all the resources focused on core products and services.
This help the company gain a forte & competitive edge. This reduces costs & also generates cash inflow which can be redirected to invest in core products production & marketing.
4. Process Re-engineering
Introduction of efficient ways to manufacture a product.
It involves technological innovations.
5. Value Engineering
It focuses on quality enhancement.