Corporate Governance in Transition by Marjan Marandi Parkinson

Author:Marjan Marandi Parkinson
Language: eng
Format: epub
ISBN: 9783319771106
Publisher: Springer International Publishing

Financial Distress and Associated Causes

Financial distress: The parent company as a going concern was adversely effected by a £12.5 m decrease in revenue (before tax) at the end of financial year 2007, leading to £12 m loss before tax, falling share price and no dividends for shareholders. The company, with total assets of £126 m against total liabilities of £91 m was balance sheet solvent. However, it was cash flow insolvent as its total current assets (£41 m) were less than its total current liabilities (£48 m). The company was in need of some form of informal rescue.

Internal causes: Prior to February 2008, sales were affected by closure of some concessionary stores run by Dorothy Perkins, in a setting of exceptional competition between companies in the retail shoe market . The company acquired the stock and the brand of the insolvent company Dolcis in February 2008, resulting in exceptional costs that were written off at the time of acquisition.

External causes: The company blamed a difficult trading position on “increasing costs in the form of rents, business rates, minimum wage and power costs”. It also blamed the effect of “unseasonal weather patterns on the fashion business”. It was also concerned over the risks that related to borrowing including interest rates, turbulent changes in foreign currency values, credit risk and liquidity risk. The company’s properties were also affected by the crash of financial markets , resulting in a substantial reduction in their value.

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