Period of Financial Distress

A period of financial distress occurs when a company faces severe cash flow problems, making it difficult to meet its financial obligations such as debt payments, salaries, or operating expenses. Financial distress can result from declining sales, high debt levels, or economic downturns. If unresolved, it can lead to bankruptcy or restructuring. Identifying financial distress early allows companies to implement measures to stabilize their finances.

Example

A retail chain experiences a period of financial distress as sales decline sharply during an economic downturn, forcing it to negotiate with creditors to avoid bankruptcy.