How is 'financial distress' defined?

Financial distress is defined as a situation where a firm struggles to meet its debt obligations and cannot access adequate financing. This condition occurs when a company's cash flow is insufficient to cover its financial commitments, such as interest payments or principal repayment on debt. It signifies that the firm is facing significant economic challenges that could jeopardize its ongoing operations and financial health.

This situation may arise due to various factors, including operational inefficiencies, market downturns, or increased competition, which result in insufficient revenues. In financial distress, a company often finds itself unable to obtain new funding or refinance existing debts, further compounding its troubles. This lack of access to financing is critical because it limits the firm's ability to navigate out of its difficulties, making it a central aspect of financial distress.

In contrast to the other options, being financially distressed is not related to operating profitably or experiencing a temporary decrease in revenues. Similarly, while filing for bankruptcy is a potential outcome of financial distress, it is not the defining characteristic of the condition itself but rather a result of prolonged financial difficulties if no remedial actions are taken.