Financial PM

Abstract

Financial distress or financial crisis is a term in corporate finance for a situation in which a company faces severe financial problems and struggles in satisfying financial obligations, e.g. debts and loan payments (Gabler-Wirtschaftslexikon, Unternehmenskrise. https://wirtschaftslexikon.gabler.de/definition/unternehmungskrise-49331, 2018). The term is used to indicate a condition when promises to creditors of a company are broken or honoured with difficulty. If financial distress cannot be relieved, it will ultimately lead to insolvency. Financial distress is usually associated with some costs to the company. These are known as costs of financial distress. Financial distress refers to a condition in which a company cannot meet, or has difficulty paying off, its financial obligations to its creditors, typically due to high fixed costs, illiquid assets or revenues sensitive to economic downturns. Recent examples like the company Jack Wolfskin show that companies must anticipate and prevent a situation, which puts the company under stress (Handelsblatt, 2017). An emergency in the monetary framework may prompt huge financial expenses and include monetary decay, insolvencies and rising joblessness, hence imperative to counteract monetary emergencies through correspondence with respect to dangers and by staying alert to changes and vulnerabilities (Sweden’s Central Bank, 2018). Thereby, a financial crisis can be prevented and involves immediate actions and related interactions with stakeholders like banks, employees, suppliers or investors (Helmold et al., Erfolgreiche Verhandlungen. Best-in-Class Empfehlungen für den Verhandlungsdurchbruch. Wiesbaden: Springer Gabler, 2019). A company under financial distress can incur costs related to the situation, such as more expensive financing, opportunity costs of projects and less productive employees. Employees of a distressed firm usually have lower morale and higher stress caused by the increased chance of insolvency, which threatens them to be forced out of their jobs (Helmold et al., Erfolgreiche Verhandlungen. Best-in-Class Empfehlungen für den Verhandlungsdurchbruch. Wiesbaden: Springer Gabler, 2019). There are often alarm signals indicating the upcoming crisis as outlined by various authors (Schmuck, Financial distress and turnaround. An empirical analysis of the automotive supplier industry. Wiesbaden: Springer, 2013; Müller, Krisenmanagement in der Unternehmung: Vorgehen, Massnahmen und Organisation. Bern: Peter Lang Verlag, 1985).

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John Kotter