What Is Financial Distress?

Bankruptcy is a result of business operations. The process of achieving this result is a series of identifiable links: stable operation-unstable operation-financial distress-bankruptcy. Financial distress also known as financial crisis (financial crisis): refers to insufficient cash flow to compensate existing debt.

Financial distress

Three meanings

When the word "financial distress" is used in the corporate world, its meaning is also diverse. It can be,

Meaning (1): Financial distress occurs when the relative value of corporate debt is "insignificant."

Meaning (2): Enterprise

Loss-making financial distress

Losing enterprises can be divided into three categories: accidental loss enterprises, intermittent loss enterprises and continuous loss enterprises according to their loss time. An occasional loss company refers to a company that has not suffered losses in history, but only has suffered losses for the current year. An intermittent loss company refers to a company that has suffered losses from time to time, but is not a continuous loss company. Enterprises that have lost money for more than two consecutive years. It is necessary to figure this out. Because China's financial system stipulates that corporate losses can be made up of profits in subsequent years, corporate profits can be made up of losses in previous years and then calculated for income tax, but the compensation period cannot exceed three years. If three consecutive years of losses, the first year of loss cannot be covered. The main reasons for corporate losses may be:

The sales revenue is too small, and the cost is too large;

Sales revenue is too small and cash is in short supply;

The cost is too large and the cash is in short supply;

The sales revenue is too small, the cost is too large, and the cash is short.

For the first three situations, if the company can strengthen management, the problem is not difficult to solve. But the fourth scenario is financial distress. Without strong measures, I am afraid that companies can only go bankrupt and have no other choice.

For example, in 1976, the North American agricultural machinery giants Massey Ferguson, International Harvester, and Deere had market shares of 34%, 28%, and 38%, respectively. Later, as oil prices rose,

Foreign Studies on Financial Distress

In progress

Objective situation of our country

Because in actual empirical research, it is often necessary to use objective and observable signs to determine the research sample, so researchers regard whether the company applies for bankruptcy as a sign of whether the company is in financial distress. But bankruptcy is a legal act.

Financial crisis and financial difficulties

Financial distress is more commonly called "financial crisis" and "financial difficulty" in China, but what is financial distress is lack of a clear definition and standard judgment in terms of the connotation of the concept. Judging from the results of foreign studies, although there are some differences among scholars, consensus has been basically formed in the following aspects:

General model for financial distress management

According to the actual situation of different enterprises, there are three main ways to deal with financial distress: the first is

China's new bankruptcy law has been revised since 1994. How to summarize past experiences and lessons, and learn from the successful experience of foreign reorganization and bankruptcy legislation, to formulate a bankruptcy law that is suitable for China's national conditions and in line with international standards is a complex legal issue It is beyond the scope of this article to study, and here are just some policy suggestions on some basic principles of financial distress theory.

(1) Reorganization under bankruptcy protection has a certain legal basis and practical experience in China, but due to economic constraints, market environment and legal system constraints, private reorganization and prepackaged bankruptcy and reorganization are almost blank. However, the theoretical research is forward-looking and systematic, and private reorganization has certain advantages, which is more suitable for distressed companies with better quality. The theoretical research and the legal framework should be strengthened in this regard so that banks can engage in rational debt processing. The reorganization approach of Chinese enterprises makes theoretical preparations.

(2) State-owned enterprises are more suitable for formal reorganization. On the one hand, because of the complexity of state-owned enterprise reorganization, the government and the court must be involved. Second, the financial leverage of state-owned enterprises is generally very high. Compared with private reorganization, formal reorganization The adjustment of capital structure is more flexible.

(3) Empirical research abroad has found that 70% of the companies applying for formal reorganization have no economic significance, which means that those leaders who have no benefit and should be liquidated by bankruptcy will seek bankruptcy protection in order to maximize personal benefits. The study of bankruptcy law from the perspective of agency cost should be paid attention to. In the process of dealing with financial distress, the participation of creditors and early intervention should be strengthened from the mechanism, and the problem of agency costs for managers should be suppressed. Minimize administrative intervention and give play to the role of asset management companies and intermediaries.

(4) Since the Asian financial crisis, financial stability has been recognized and valued by our country, and the importance of protecting the interests of bank creditors is easily accepted, but with the continuous changes in the economic environment and China's accession to the WTO, commercial creditors and ordinary corporate bonds The issue of how to protect the interests of holders and other creditors cannot be ignored.

(5) The key to the promulgation of China's new bankruptcy law is not the legislative technique, but whether the conditions for its implementation are met. Due to the imperfect current social security system, the initial job market itself is under great pressure, commercial banks' non-performing loans are relatively serious, and the international and domestic macroeconomic development expectations are uncertain, and the timing of the introduction of a new bankruptcy law may not be mature.