A business that is experiencing financial difficulties and is at risk of bankruptcy or insolvency. A distress company is unable to meet its financial obligations such as paying off its debts.
Because a distressed company is in a situation that revolves around it financial state, this condition is often referred to as financial distress.
Financial distress can occur for a number of reasons that includes; poor management, declining revenues, or excessive debt.
Distressed companies often require significant restructuring or financial intervention strategies (like cutting back cost) in order for it to return to profitability.
An example of a cost cutting strategy that a distressed company might undertake is laying off its workers and downsizing. However, these strategies could have a backlash on the company by demoralizing employees and resulting in lower overall productivity.
In the end, the company ends up bankrupt, a situation which it was trying to avoid in the first place. The best way to avoid this is to nip the problem in the bud at an early stage.
To do this, you should watch out for the following signs of distress;
- Declining sales
- Low profit margin
- Inability to break even
- Cash flow issues