What might financial distress lead to if unresolved?

Financial distress occurs when a company struggles to meet its financial obligations, which can arise from factors such as declining revenues, increasing expenses, or poor management decisions. If this situation remains unresolved, it can escalate and lead to bankruptcy or insolvency. Bankruptcy is a legal process where a company either liquidates its assets to pay creditors or undergoes reorganization to continue operations, while insolvency refers to the state of being unable to pay debts when they are due.

The threat of bankruptcy or insolvency indicates severe financial problems, which can erode stakeholder confidence, adversely affect employee morale, and diminish brand loyalty among customers. Ultimately, the implication of this choice underscores the gravity of financial distress and highlights the potential for catastrophic outcomes if a company is unable to recover or restructure effectively.