Financial Distress Observations

Instructions:

You are required to participate in all three of the discussions in this course.

Discussion topic:

We've seen some of the common effects of financial distress on a firm:

• A firm may have to lower prices to attract customers or it may lose its customers outright. Financial distress leads to particularly severe customer revenue losses for firms that sell products with quality that is important yet hard to observe, and for firms that sell products that require future servicing.
• Financial distress leads to severe supplier problems for firms that rely heavily on trade credit; the likelihood that trade credit will be terminated increases.
• Most employees will look for other jobs. The most competent, highly motivated employees will likely find jobs. The less competent, less motivated employees will likely not. Even if the firm never actually declares bankruptcy, it will be left with only the employees who were unable to find work, and those employees will run the firm. Again, we have the firms capital structure affecting its operations. When a firm with significant debt in its capital structure experiences a downturn in its operations, it increases the likelihood that it will lose its best employees. Financial distress leads to severe problems for firms that rely on highly trained, specialized employees.

Reflect on these common problems that companies in financial distress experience. When have you observed this in real life, whether as a supplier, vendor, worker, or customer of a firm? What did you observe that led you to understand that the firm was in financial distress? What was the outcome in that case?