Although they are related to financial problems, they have essential differences. Here is the difference between financial distress and bankruptcy and why it is crucial to understand both.
Financial Distress
Financial distress occurs when a company faces difficulty in meeting its financial obligations. Various factors, including declining revenue, high operating costs, excessive debt, intense competition, or market changes, can cause this. In a state of financial distress, a company often struggles to repay its debts, achieve stable profits, or maintain adequate liquidity.
Financial distress does not always mean that a company will go bankrupt. In many cases, companies can take steps to address economic problems, such as debt restructuring, cost-cutting, seeking additional funding, or forming strategic partnerships. The goal is to restore the company's financial health and ensure its continuity.
Bankruptcy
It occurs when a company cannot fully meet its financial obligations and is declared unfit to repay its debts. Bankruptcy often results from unresolved or prolonged financial distress. In a bankruptcy situation, a company may file for bankruptcy protection in court to safeguard its assets from creditor claims and initiate the process of restructuring or liquidation.
So, what's the difference?
The main difference between financial distress and bankruptcy lies in the severity of the company's economic problems. Financial distress refers to financial difficulties that can be overcome and do not always lead to bankruptcy. In a state of financial distress, a company still has opportunities to improve its financial condition through corrective measures.
On the other hand, bankruptcy is when a company can no longer fulfill its financial obligations and must seek legal protection or cease operations. Bankruptcy often represents the endpoint of an unsuccessful attempt to address financial distress.
Understanding financial distress and bankruptcy is essential for business leaders, investors, and creditors. By recognizing the signs of financial distress, companies can take necessary steps to prevent bankruptcy and address economic problems quickly. Investors and creditors must also understand the differences between these terms to manage their investment risks wisely.
Source : jurnal.id
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