Question

How is reduced liquidity often the first domino to fall in a distressed company’s potential path to bankruptcy?

What are the leading indicators of distress that could be revealed through analysis of the company’s financial statements?

Once diagnosed, what were some alternative courses of action that GM leaders pursued to remedy their financial difficulties?

Answer 1

Liquidity refers to the ability of a company to have enough cash or cash equivalents to pay off the company's liabilities. Reduced liquidity means shortage of cash. It is the first sign that the company is not able to generate enough cash through its operations to service its liabilities. If not remedied by instant measures, it could very well lead to bankruptcy.

The first indicator of distress on the analysis of the financial statements are dwindling cash reserves and bank balances. On a detailed analysis, a current and quick ratio less than 1 is a strong indicator of distress in the company.

Once diagnosed, the GM leaders pursued the following measures to remedy their financial difficulties:

- It split the company into 2 parts- New co- with a clean balance sheet and Old co- with the companys liabilties.

- It used the bankruptcy code 363 to sell off its assets.

- Taking funding from the government.