Financial Distress

What Is Financial Distress?

Financial distress is a circumstance when a company or individual face not producing enough
revenues or income, and not capable of meeting or paying its financial obligations. The cause of
financial distress can be divided in to two categories

Cause of financial distress

1. For company 2. For Individual

-High fixed costs -Poor budgeting

-Overspending

-Revenues sensitive to economic downturns -Too high of a debt load

-Unexpected expense -lawsuit

- Poor economy -loss of employment

-Poor spending decision -Poor money management

-High amount of receivable -Divorce

A company may features bankruptcy when financial distress stayed for long moment. Before
financial distress damages more than what is already appeared it must be addressed and
necessary action should be taken to recover from it.
Example- As an example we can see how one company or individual how financial distress affects their
credit rating go down. If it has lack of finance this leads to lenders to charge them higher interest rate
because as the time passes the interest rate increases daily then this problem creates another problem
which is to borrow money and even faces a problem of survival.
Reorganization
What Is Reorganization?

Reorganization is a process of restoring distressed business in to its normal operation cycle or

regaining its profitability. This process may consist of shutting down or selling of division
replacing management, cutting budgets, and laying off workers. Reorganizing company should
pass the procedure of chapter 11 bankruptcy process which means required to submit a plan how
to recover and how to pay its obligation. Chapter 11 bankruptcy means U.S. bankruptcy law
offers public companies the opportunity of reorganizing rather than liquidating. An insolvent
company can have the chance to submit a reorganization plan if a bankruptcy court gave a right
and approved. So it can continue to operate and reschedule paying debts until a later on. If the
plan discarded the company required to liquidation. Company’s asset will be sold and the cash
will be distributed among its creditors in order to meet its obligation.

Reorganization is not as such simple process it needs a restatement of company’s asset and
liability plus negotiation with key creditors to set new timetable to pay its obligation.
Reorganization can take a form of merger or consolidation, spinoff acquisition, transfer,
recapitalization, a change in name, or a change in management due to change in the structure
of company. This process is known as restructuring. There is also called a process called
structural reorganization which reflected by of budget cuts, staff layoffs, management ousters, and
product line revisions. If the reorganization is unsuccessful the first right given to creditors, senior
lenders, bondholders, and preferred stock shareholders to get back their money at last if excess asset
left will be distributed among shareholders. This shows us there is a sequential order in order to get
back their asset.
What is Predictive Modeling?
Predictive modeling means used to compute the probabilities of different outcomes using a set of
methods, usually with a mixture of statistics and logic. Each predictive model is appearing with
multiple assumptions which are founded on various variables. The variables are measured
depending up on how they have an effect on the future output data. Using this technique we can
simply estimate, guess and shape out.

Predictive Modeling Life Cycle

The life cycle of predictive modeling has consists of five orders:

1. The first step considers collecting of data from different sources. If we take customer
as an example so the information is in this case will be purchase, age ,gender etc
2. The second step is making ready the already collected data to make them easy for
analysis. This is the longest step of all. Especially it will be long for those who work
for the first time.
3. The third step is in order to accept or reject the hypothesis it will be analyzed using
different technique.
4. The forth step is a step of forecasting, predicting model technique using their
understanding.
5. Due time factor we cannot say all the process is over due time factor it needs
adjustment in order to update.