Cash Flow Is Not Enough To Compensate For Existing Debts.

Financial distress: cash flow is not enough to compensate existing debts.

The meaning of financial distress is also varied in the business world. It can be, 1., financial distress occurs when the relative value of corporate debt is "negligible".

2. the cash flow of an enterprise is not sufficient to compensate for its existing debts, which include unpayable payments, litigation costs, interest and principal liabilities for breach of contract.

Financial distress usually leads to renegotiation between an enterprise and at least one of its creditors.

3. there is a mismatch between current assets and current liabilities.

Thus, from a different point of view, its meaning is quite different.

We analyze the reason from the result of the incident.

In reality, we can see that when the value of existing assets of enterprises is insufficient to repay debt value or business cash flow is not enough to compensate the existing debt, companies usually have two consequences of bankruptcy and reorganization.

The insufficient value of existing assets to repay liabilities is the absolute low capacity of capital gains, so bankruptcy is the inevitable consequence.

The cash flow of enterprises is insufficient to compensate for the relative low capital flow capacity that the existing debt may reflect. It can help enterprises avoid bankruptcy and maintain the ability of enterprises to continue operation through a series of actions.

These actions include: selling major assets; merging with other enterprises; reducing capital expenditure; issuing new shares; negotiating with creditors; and changing creditor's rights.

The first three items are assets reorganization, and the latter three are debt restructuring.

When these actions failed, they entered the bankruptcy proceedings.

The above two situations are different in nature.

The latter can be said to be a "predicament", and a series of extraordinary actions can be taken to restore the ability of enterprises to continue operation.

Therefore, the latter situation is defined as financial distress, that is, the cash flow of business operation is not enough to compensate the existing debt.

In order to restore the ability to continue operation, enterprises who have fallen into financial difficulties must bear certain cost -- financial distress cost.

According to the matching state of asset return and asset flow, financial distress can be divided into two categories:

According to the time of loss, a loss making enterprise can be divided into three categories: occasional loss enterprise, discontinuous loss enterprise and continuous loss enterprise.

Accidental loss enterprises refer to enterprises with no loss in history, but only those who are currently losing money for a year. Enterprises with intermittent losses refer to enterprises that have suffered losses in history but are not continuously losing money. Enterprises with immediate losses and time losses are continuous losses enterprises that mean losses for more than two consecutive years.

It is necessary to understand this.

Because the financial system of our country stipulates that the loss of an enterprise can be made up by the annual profit. The profit of the enterprise can first make up for the loss of the previous year, and then pay the income tax, but the time limit can not be more than three years.

If there is a continuous loss for three years, the loss in the first year can not be compensated.

The main reasons for the loss are: (1) the sales revenue is too small, the cost is too large; second, the sales revenue is too small, the cash is scarce; third, the cost is too large and the cash is scarce;

For the first three situations, if enterprises can strengthen management, the problem is not difficult to solve.

But the fourth case is financial distress.

If we do not take strong measures, I am afraid that enterprises can only go bankrupt.

For example, in 1976, the market share of North American agricultural machinery giant MasseyFerguson, international Harvester and Deere was 34%, 28% and 38%, respectively. Three.

Then inflation was high because of the rise in oil prices.

In 1979, the Federal Reserve raised interest rates to curb inflation.

But this increased the cost of user financing to purchase agricultural machinery, and the demand for agricultural machinery dropped significantly.

MasseyFerguson and international Harvester are in serious financial difficulties due to heavy debt burden.

Deere, which has a low debt burden, makes necessary investments with unused debt financing capabilities to support troubled dealers.

In 1980, Deere's market share rose to 49% in North America, while MasseyFerguson and international Harvester dropped to 28% and 22% respectively.

By the end of 1980, the demand for agricultural machinery industry was still stagnant.

As debt financing capability declined, Deere company was faced with the choice of reducing investment projects and issuing new shares.

In January 5, 1981, Deere announced that it would issue $172 million of new shares to invest in the necessary projects, while repaying part of the debt and reducing the debt ratio.

Deere therefore restores its debt financing capability.

The heavily indebted competitors, MasseyFerguson and international Harvester, have been in financial difficulties and finally declared bankruptcy.

According to their development, profitable enterprises can be divided into profitable enterprises with steady development and profitable enterprises with extraordinary development.

Supernormal development is a straight line development or rapid growth, which only seeks profits, regardless of risks.

Although there are many successful entrepreneurs and enterprises who have gained extraordinary development through loan and high debt investment, the phenomenon of "technological pformation and expansion of debt crisis" is very common.

Profit based financial distress often starts with expanding sales.

In order to expand sales, we increase the inventory of finished goods, stock of raw materials, increase receivables and increase investment in equipment.

Specifically, it is a fear of insufficient production capacity at the first sight of orders.

Increase equipment, invest in fixed assets, and have insufficient funds, so borrow money.

It leads to excessive fixed assets and excessive liabilities.

After purchase of fixed assets, more relevant raw materials and funds will be needed.

This leads to overstock and increases the capital of finished products.

At the same time, as debt or credit increased, liabilities increased further.

In this way, the inventory of finished goods is too large, resulting in excessive credit sales and excessive receivables. Excessive receivables will further lead to increased borrowing or insolvency of payments, and liabilities will increase again, which is a vicious circle.

Once the market is changing and sales are slumped, there will be a shortage of cash and a financial difficulty of "profitable and money free".

The problems of enterprises often start from capital and spread to all levels of management, eventually leading to the bankruptcy of enterprises.

1. establish sound business objectives

Conservatism usually refers to the ability to resist negative events in the economic field.

A sound operation should be that an enterprise has solvency and has this capability continuously.

From its balance sheet, the net cash value of a continuous period is positive, and the net cash flow of the cash flow statement is also positive.

This shows that the profitability of enterprises is matched with solvency, and efficiency and profitability complement each other.

In a market full of risks and competition, if there is no efficiency, the enterprise will lose money and eventually go bankrupt. If there is no liquidity and insufficient capital, the enterprise will be vulnerable. When encountering the impact of external forces, it will be very easy.

Bankruptcy.

The bankruptcy of W.T.Grant company in America has sounded the alarm for this crisis.

W.T.Grant, a large national retail organization, declared bankruptcy in 1975.

In response to this bankruptcy, many people feel suddenly, because the profit and loss account shows that W.T.Grant company is profitable until the year of bankruptcy.

But it is found that it has a negative cash flow of 8 years in the 10 years before bankruptcy.

The efficiency and profitability of the company have been seriously distorted.

In reality, we often find that some profitable enterprises are struggling in the predicament, while some loss making enterprises can continue to operate.

This indicates that there is a kind of business energy, which should be related to the profitability of enterprises and related to capital mobility.

Continuous profitability is the driving force of enterprise value, while moderate liquidity is the guarantee for continuous operation of enterprises.

This kind of business energy is the sound operation ability of enterprises.

"Operational robustness" indicates the matching degree between asset returns and asset flows.

A simple method of estimating this index is to compare the expected return on assets and the cash flow index in a continuous period.

Namely:

When we use the "business conservatism", we should analyze the direction of changes in the expected return on assets and the cash flow index.