These days, I am busy to cover some CS Accounting Notes topics. Actually, I have written many topics relating to this in the site. But still there are many topics are pending to explain. I think, without study the basics of anything, we can not write any topic well. So, today, I studied my self financial distress which is the one of important topic of CS Accounting. Here, I am sharing what I learned financial distress in wikipedia.
Financial distress is a situation in which company can not live more because company did n't take good decisions and fund goes to nil due to heavy loss which has been given by creditors. So, financial distress means loss of trust of creditors. At that time, company must be liquidate. Suppose, if a company who has $ 100 as long term debt but due to big loss, if its all assets are just $ 20. It means it has no capacity to pay the loan. This situation is financial distress. There are lots of reasons of financial distress. It may be possible that company made large number of finished product but it could not sell all these product or company took loan at high rate of interest and earned profit is less paid interest. So, company must suffer the cost of financial distress. Wikipedia shows general expenses as cost of financial distress
1. Auditor's fees
2. Legal fees
3 management fees
In next para, I am thinking, wikipedia is saying deep words regarding the interest of creditors and interest of shareholders.
* Important point in Financial Distress
Suppose total liability is $ 100 in which shareholder's equity is $ 60 and debt equity is $ 40. But market value of company is just $ 20 in market. But, if management sees, if we invest company's all asset in risky project, company's value may increase up to $ 40 dollars. But after taking this risk, if probability of loss of $ 10 out of $ 20, then it will be also big financial distress because risky projects are not in the interest of creditors.
New way to increase the value of Company and Relieving in case of Financial Distress
1. Adjustment in financial statement.
2. Debt Restructuring is the technique in which company talks with creditors for reducing and renegotiate for solving this financial distress.
3. Re-organization of their group structure by evaluating and analyzing their core and non-core assets.
If you want to know more new thing relating to financial distress topics, please read our resources :
Financial Crisis
Financial Disaster
Financial Risk
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