Research And Describe What Is Financial Distress? (Essay Sample)

1. What is financial distress? 
The definition of the above term has been termed as difficult due to myriad causes of financial distress. However, it can be defined as a situation in which a business is unable to pay its financial debts because its current assets cannot enable it to meet these obligations. There are different issues that can cause a corporation that fall into distress. The causes however are not precise and cannot be limited to an outline of causes because they are many. However some of them include those of: a reduction in dividends, it may also cause the closing of the plant, increased losses, lay off, resignations and a drop in the value of the shares (Ross, 2012).
However there are various warning signals that your business may be in financial distress. These are those of: poor profits, these indicate that the entity is likely not to raise enough money for its operation and as a consequence will end up borrowing the money. This increases the risk of the company becoming bankrupt which is one of the consequences of financial distress (Kagunya, 2015).
The other indicator of financial distress is poor growth in the sale or a plummeting of the same. This shows that the market is not convinced of the product and the consequences is failure of the business. In addition, is the poor quality of products this causes the customers to purchase competing products and thus causing distress to your business. Low current ratio which may be contributed by slow paying debtors is another lacuna which results in distress of your entity (Kagunya, 2015.). An increased reliance on one particular individual among the directors to make decision is another indicator that the business is financial distress. This director or manager may make decisions which may be consequential for the entity.
Another indication is increased constant borrowing to cover for short term shortages while the company is in operation. This occurs mostly to the highly levered firms which ultimately fall into bankruptcy (Wilkinson, 2013).
2. what happens in financial distress?
Once financial distress occurs to a company there are many consequences that follow which are majorly the consequences of the distress. These include: expansion policies which includes the expansion of the assets of a business entity and this is done by acquiring another business or increasing the size of its assets (Ross, 2012).
The other step that a company can take is the operation reduction strategy where a company takes step to focus on its profitable business only and reduces the operations costs for other business that it considers non-viable. This is done to reduce the liabilities that may accumulate as a result of continuing to operate the loss making ventures.
The entities may also take the steps of revising their financial policies. These may include cutting on dividends, issuing debt securities to reduce the financial burden (Ross, 2012). The owners may oopt for an external control activity and this may be via the selling of their share capital to a more economically endowed investor. This changes the strategy as was demonstrated by the almost bankruptcy situation of the Celtic Football Club that led Fergus McCann to buy out the Club turning it around to profitable(Ross, 2012). This point may also be coupled with that of changing the management which of course changes the strategy of running the entity.
Finally the company or the business can be wound up. This may be followed by winding up costs and is largely undesirable. This is caused by the business not calculating the risk associated with constant borrowing as noted by Wilkinson (2013). The consequence of distress is loss of reputation and vulnerability to absurd business gimmicks of the competitors. Conflicts of interests also arise with the owners of the business in fright to invest in further risky business whereas the creditors may really be willing the risk to be taken up (Wilkinson, 2013).
3. Examples of companies undergoing financial distress?
Some of the well known brand that are in financial distress include: office max, the company has been hit very hard economically with the computerised offices being founded. As a result, the company has been making losses in millions. To curb this situation there has been a proposal for a merger with Staples for an amount in excess of six billion dollars.
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