Abstract
Financial distress or related financial emergency is a term in finance in which an organization faces extreme budgetary issues and battles in satisfying money-related commitments, for example, obligations and credit payments (Gabler Wirtschaftslexikon 2018). The term is utilized to show a condition when guarantees to loan bosses of a company are broken or respected with trouble. In the event that money-related misery cannot be relieved, it will ultimately prompt indebtedness. Financial distress is typically associated with certain expenses to the organization. These are known as expenses 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 shows that companies must anticipate and prevent a situation, which puts the company under stress (Handelsblatt 2017). A financial crisis can be prevented and involves immediate actions and related pricing strategies with stakeholders like banks, employees, suppliers or investors (Helmold et al. 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. 2019). There are often alarm signals indicating the upcoming crisis as outline by various authors (Schmuck 2013; Müller 1986). Alarm signals like decreasing revenues, high operating cost and low profits usually indicate that a company is not in a good financial health situation (Schmuck 2013). Struggling to reach profitability targets over a longer period indicates a business cannot sustain itself from internal funds and needs to raise capital externally (Helmold et al. 2019). This raises the company’s business risk and significantly lowers its credit rating with banks, lenders, suppliers or investors (Schmuck 2013). Limiting access to funds typically leads to liquidity issues and results often in a company failing as shown in Fig. 10.1 (four phases model of Müller). Poor sales growth and sales decline indicates the market is not positively receiving a company’s products or services based on its business model. When extreme marketing activities result in no growth, the market may not be satisfied with the offerings, and the company may close down. Likewise, if a company offers poor quality in its products or services, consumers start buying from competitors, eventually forcing a business to close its doors.
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Helmold, M. (2020). TRM in Companies with Financial Difficulties. In: Total Revenue Management (TRM). Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-030-46985-6_10
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