Financial Distress: Understanding According to Experts, Causes, Types, Categories and Ways to Overcome It
Financial Distress: Understanding According to Experts, Causes, Types, Categories and Ways to Overcome It – What is meant by Financial Distress and what causes it? Let's look at the discussion together in the article below to better understand it
Financial Distress: Understanding According to Experts, Causes, Types, Categories and Ways to Overcome It
The term financial distress refers to a company's declining financial condition prior to bankruptcy or liquidation. A company can be said to experience this condition, if the company shows a negative number on its net profit, operating profit and book value of its equity. It is also possible that the company will do a merger or diffusion, namely the merging of two companies which then only maintain one of them.
Financial distress is an unhealthy state of the company's financial condition before it becomes a problem, crisis or bankruptcy. This financial difficulty occurs when the company fails or is unable to fulfill the debtor's obligations due to a lack or lack of funds to continue or continue its business.
Signs of a company experiencing financial difficulties include late deliveries, poor product quality, and delays in paying bank bills.
Definition of Financial Distress According to Experts
-
Brigham and Daves
Financial difficulties begin when companies fail to meet payment schedules or when cash flow projections predict that companies will soon fail to meet their obligations.
- According to Platt and Platt
Financial distress is a stage of reduced financial condition of a company that occurs before bankruptcy or liquidation.
- According to Gamayuni
Financial distress is a state of financial or liquidity problems which may be the beginning of bankruptcy.
- According to Darsono and Asari
Financial difficulties or financial difficulties can be interpreted as the company's inability to pay its financial obligations on the date that caused the company to go bankrupt.
- Kahiya and Theodosius
Financial difficulties of business companies experiencing financial difficulties experienced growth, profitability, decrease in fixed assets, and increase in inventory levels compared to the company Healthy.
Causes of Financial Distress
According to Brigham and Daves (2003), the phenomenon of financial distress itself often occurs for several reasons. Among them are, the frequent occurrence of a series of errors, inappropriate decision making by managers, and the weaknesses that are interconnected contribute directly or indirectly to management and the absence or lack of efforts to monitor financial conditions so that the use of money is not in accordance with necessity.
Causes of Financial Distress include:
-
Small capital structure
- Lack of capital to buy capital goods and equipment.
- Lack of capital to take advantage of inventory items that are sold at a discounted amount or other type of discount.
-
Use of old business tools and methods
- Inventory management implementation failure.
- You have no control over your credit.
- Inadequate accounting records.
-
Lack of business plan
- Unable to detect and understand changes in the market.
- I can't understand the change in the economic situation.
- Don't plan for emergencies or unforeseen situations.
- Unable to predict and plan financial needs.
-
Individual qualifications
- Lack of business knowledge.
- I don't want to work hard.
- I don't want to delegate tasks and authority.
- Unable to maintain good relations with consumers.
Types of Financial Distress
-
Financial failure. This is the state of the company's income that cannot cover the company's total costs, including the cost of capital.
- Business standards, namely the state of a company that suspends its business activities to reduce (because of) the loss of creditors.
- Technical bankruptcy is a condition where a company cannot fulfill its payment obligations.
- Bankruptcy Bankruptcy is a condition where the carrying value of total liabilities exceeds the market value of the company's assets.
- Legal bankruptcy is a state where a company is said to be legally bankrupt.
Financial Distress category
-
Category A of financial difficulty (very high and very dangerous)
In this category, in addition to companies that have declared bankruptcy or bankruptcy, you can also report that bankrupt companies (bankrupt) to related parties, such as courts, and hand over the various problems handled outsider.
- Category B of financial difficulty (expensive and considered dangerous)
In this category, companies must consider different realistic solutions to store the various assets they own, such as sourcing assets for sale and maintenance. Including thinking about the various implications of the merger and acquisition decisions taken.
One implication of the company being in this position is that it starts laying off people (end of employment) and the early retirement of some employees which was once again deemed impossible to achieve maintained. is.
- Category C from financial difficulties (believed to be able to save themselves)
In this category, companies need to reinvent various management policies and concepts that were previously implemented.
If appropriate, hire new professionals with the ability to be placed in strategic positions responsible for managing and improving the company, including goals to improve profitability.
- Category D of financial difficulty (low)
In this category, companies are considered to only experience temporary financial changes caused by various external and internal conditions, such as births and improper decisions.
Methods for Overcoming Financial Distress
-
Debt Restructuring
Debt restructuring is debt repayment under lighter terms than previous debt payments based on concessions from creditors. The aim is to give debtors a grace period to adjust and improve their financial condition.
- Selling Some Assets
When experiencing financial distress, a company will certainly need funds to cover certain costs. This can be done by selling some of the company's assets. Of course, before taking steps to sell these assets, careful consideration is needed and with long-term risk in mind.
- Company Reorganization
Another way that can be taken to handle financial distress is to reorganize the company. Because, after all, the company's performance depends on the individuals who work in it. This can be overcome by recruiting professional people. Through this recruitment, it is hoped that the company's financial condition can be saved, even before bankruptcy.
- Company Mergers
You can't make just any company a merger partner. Make sure that the company has a healthy financial condition and good cash flow. Through this one step, your company's finances will be a little helped and avoid bankruptcy.
Thus the review from Seputarknowledge.co.id about Financial Distress: Understanding According to Experts, Causes, Types, Categories and Ways to Overcome It ,hopefully can add to your insight and knowledge. Thank you for visiting and don't forget to read other articles.
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