Topic: Financial distress and its impacts on textile sector in Pakistan.
CHAPTER NO.1 INTRODUCTION OF THE STUDY
The term “Financial Distress” is referred to the situation of an organization where the payments to the creditors of the company cannot be made on the due dates or the specified dates of the payments. In another situation of the financial distress the payments to the creditors are made with a great difficulty (Warner, 1977).
The financial distress leads to the circumstances where the existence of the organization is much difficult, and business is quite close to the dissolution (Gilson, 1977).
Generally “Financial Distress” shows that the organization is breathing its last. The stage after the “Financial Distress” is the bankruptcy.
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“Sickness” is the term used for such an organizations which for a consecutive period of seven years is suffering losses which are more than the net worth of the organization (Kaplan, 1998).
Moreover, if projection of the accounting statements or the funds flowing statements of the organization are carried out, the organization seems to be carrying out the same situation for one or two more financial years and is ultimately going to fall a prey the most fatal and the stage which will lead to the dissolution of the organization.
1.1 Major factors that lead to the financial distress of an organization.
The following are the reasons that lead an organization to a situation of difficulties in terms of arranging its finance for the payments and for carrying out the various day to day activities which is termed as the management of working capital are as follows
1.1.1 Lack of accounting techniques
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If these debts are invested properly and the rate of return is more than the rate of interest charged by the debt providing financial institution then it is said to be a properly managed debt. If the situation is the vice versa then the above mentioned situation will also reverse and will lead to the “Financial Distress”.
1.1.8 Low sales volume and high expenditure.
The difference between the sales volume and cost of sales is also considered a reason of an organization which falls to financial distress. The higher cost of the goods sold sends an organization to a point from where a position which is called “Financial distress” is very near (Wruck 1990).
An organization if not so conscious in costing the product which it is going to manufacture often spend more cost then may be needed for the production and ultimately it has to increase the sales price to obtain a reasonable profit. Otherwise it has to face the situation in which the costs are higher than the sales value and the result is loss. The loss suffering organization ultimately suffers the situation which is known as “Financial
The Corporation has sustained losses and negative cash flows from operations since its inception. The Corporation is exposed to liquidity risk as it continues to have net cash outflows to support its operations.
The 3 percent decline in sales causing a 21 percent decline in profits can be attributed to the identification of the accounting concept of operating leverage. Operating leverage is what business managers apply to boost small changes in revenue into sizable changes in profitability. Fixed cost is the force managers use to attain disproportionate changes between revenue and profitability. Therefore, when all costs are fixed every sales dollar contributes one dollar toward the potential profitability of a project. Once sales dollars cover fixed costs, each additional sales dollar represents pure profit. A small change in sales volume can significantly affect profitability (Edmonds, Tsay, & Olds, 2011). So, therefore, if sales volume increases,
Bankruptcy is where an individual or in this case a corporation claims that is not able to pay its lenders and/or creditors any more. By doing this the filer gains protection from its lenders while reorganizing itself to stay in business. Bankruptcy is defined by the Congress under the U.S. Bankruptcy Code, in which the Congress revised in 2005 called Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This act addresses the increased number of bankruptcy filing, loopholes and incentives that allowed for abuse and the financial ability of debtors.
1 Determine if bankruptcy is the best option for you. Bankruptcy should be considered your last option, and should only be used if you have exhausted all other possibilities.
Bankruptcy, today, is a very common thing among companies and individuals alike. Sadly enough there were as many bankruptcy cases filed in federal courts, as there were all other cases. The American bankruptcy law allows people to avoid paying their debts, by offering the debtors a discharge, which eliminates all their legal responsibilities. However, bankruptcy is a controversial issue amongst religious members of the Jewish population, for one must question whether it is morally correct to avoid paying a dept by filing for bankruptcy. According to the torah, a debt is an obligation that must be fulfilled. Consequently, if a bankruptcy discharge is invoked, under the strictness of Jewish law, one is still required to pay back the money no matter how long it may take him. According to Bais Din the debtor must hand over his property, with a few exclusions, to the creditor, and if this does not cover what he owes the creditor, then every time the debtor acquires new assets, he pays the creditor until he no longer owes him anything.
The terms ‘international insolvency’ and ‘cross-border insolvency’ have no designate meaning but are commonly taken to be interchangeable and to refer to insolvencies which derives from cross-border trading or which include the application, or possible application, of the insolvency laws of two or more jurisdictions. An international insolvency is generally characterized by one or more of the following features: the debtor’s business is conducted in different countries; the creditors are situated in different countries; the assets are located in different countries; there are parallel proceedings in different countries.
There is an enormous prospect for the Pkolino Company to start a business. The current task has adequate resources and a great plan to keep it operational. Nevertheless, dangers that might plunge Pkolino Company into financial disaster are also present. This is due to the fact that there are always a couple of things that tend to advance in an unanticipated direction even in a well- planned plan. For instance, P’kolino Company’s financial statements do not have provisions for the worst, average, and best scenarios.
Among the study’s findings were that the deciding factor of the predictor of bankruptcy should not be only a few ratios, as the measure of a company’s financial solvency may differ as the firm’s situations differ. The important question is to which ratios are to be used and of those ratios chosen, which ratios are given priority weight.
Insolvency is the point at which an individual, corporation, or other organization cannot meet its financial obligations for paying debts as they are expected. Insolvency can occur when certain things happen, some of which may include: poor cash management, increase in costs, or decrease in cash flow.
Considering that financial obligations are really commonplace in today 's world and time, you must also understand that it is an essential evil. For that reason, it is necessary that you understand the best ways to handle the crisis when it provides itself.
It shows that if the company takes too long in collecting from its debtors then it will negatively effects the returns and finally shareholder’s wealth (Tufail, 2013).
A creditor who is not a party to the bankruptcy proceedings, but who has an interest in the proceedings, may file an ex parte application with the bankruptcy court. An insolvent debtor may file a debtor’s petition for voluntary bankruptcy. The insolvent debtor must provide to the court a summary of the debts and assets. An agreement between a debtor and creditor that the amount stated as being owed to the creditor is accurate is an account statement. However, an account that is open and unsettled is an account that is current.
When a company feels that there is no way to survive its current situation and when the losses are greater than the profits, some people may bel...
The information that has for financial department will determine the budget and the planning for the organization. In establish or development for the organization, the financial information that gathers will determine the size of the company.
Insolvency can be defined as the situation whereby a debtor lacks the ability to settle the debts that they have. This definition can also include situations in which companies have numerous liabilities, most of which are greater than the assets that they have (Adams 2002, 70). The type of insolvency that regards cash flow complications often incorporates the inability of firms to settle their debts whenever they are due. The other type of insolvency that regards the balance sheet incorporates net assets that reflect negative figures, thereby representing a scenario where liabilities are greater than assets. It is worth mentioning, that insolvency is not synonymous with bankruptcy. This is because bankruptcy is a form of insolvency that can only be enforced by the courts of law and requires that legal precepts are instituted with the intention of resolving the challenge of insolvency.