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TYPE
Original Research
PAGE NO.
265-274
10.37547/tajet/Volume07Issue03-24
OPEN ACCESS
SUBMITED
30 January 2025
ACCEPTED
24 February 2025
PUBLISHED
29 March 2025
VOLUME
Vol.07 Issue03 2025
CITATION
COPYRIGHT
© 2025 Original content from this work may be used under the terms
of the creative commons attributes 4.0 License.
Operational Red Flags in
U.S. Corporations (2020
–
2025): Financial Distress
Indicators and Strategic
Responses
Shaurya Shounik
MS in Finance, Brandeis University
Independent Researcher, USA
1.
Abstract:
Following the COVID-19 pandemic, U.S.
corporations
encountered
unprecedented
financial and operational challenges. This research
examines the early warning signals of financial
distress for firms from a period of 2020 to 2025
and their strategic responses to such challenges.
We employed a mixed-method approach,
analyzing company success indicators while
incorporating qualitative insights from academic
literature and industry sources. Critical findings
indicate that in the post-COVID economy,
particular operational red flags such as declining
revenues, insufficient liquidity, escalating debt
burdens, and operational inefficiencies frequently
led to significant financial difficulties for
enterprises.
The
research
evaluates
the
effectiveness of the strategic measures employed
by firms, including significant cost reductions,
restructuring, adaptive pivots, and stakeholder
support initiatives. In conclusion, the research
indicates that a company's resilience in the post-
pandemic years (2020
–
2025) was contingent upon
the early identification of warning indicators and
timely strategic actions. Scholars, professionals,
and politicians may utilize this information to
enhance preparedness for future economic
disruptions and establish early warning systems.
Keywords:
Corporate Strategy, Financial Distress,
Crisis Management, Business Resilience, Cost
Retrenchment, Debt Restructuring.
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2. Introduction
2.1 Research Background
In 2020, the COVID-19 pandemic greatly affected the
global economy, creating difficulties for U.S. companies.
Many companies faced immediate liquidity problems
and ongoing signs of trouble that were often missed.
Spotting and fixing these early warning signs became
very important for leaders and stakeholders (Jacobson,
2024). The period from 2020 to 2025 gives us a chance
to study how companies noticed and handled these
problems (Kscope, 2020).
2.2 Literature Review
Business and academic scholars have always
endeavored to develop methodologies for forecasting
and preventing corporate failures. Older methods, like
Altman’s Z
-score, showed that financial numbers
—
like
profits, debt, and cash
—
could help predict if a company
was going to go bankrupt (McClure & James, 2024). Over
time, these methods got better as researchers used new
math and, more recently, artificial intelligence to spot
problems even sooner (Elhoseny et al., 2022). However,
current research shows that dependance on financial
metrics solely can lead to a narrow view (Shetty &
Vincent, 2021). Scholars increasingly contend that a
singular focus on financial data may obscure critical early
warning signs initially manifested in a company's
operational activities or shifts in leadership (Jacobson,
2024). Research shows that major changes in
management, company strategy, or a change in it’s
quality of products or services could suggest liquidity
problems. In other words, operational issues often
surface before financial statements show any sign of
distress (Corporate Finance Institute, 2025). Current
research examines how companies act during a tough
situation (Mallinguh & Zéman, 2020). Standard
interventions include immediate cost-cutting measures
coupled with substantial strategic reorientations to
facilitate corporate recovery. During the pandemic,
studies showed different reactions, like using more
technology, making small operational changes, fixing
finances, or changing how the company is run. A few
actions taken as a response were changing their debt
structure, selling off parts of the company (Baliouskas et
al., 2022), improvisation of operational strategy, raising
external capital, or merging with or buying other
companies (Kang et al., 2020). Companies that acted
fast, used digital tools, or made their finances more
stable were usually seen as doing well by investors
(Ashraf et al., 2019).
2.3 Problem Statement
Despite the progress made in identifying distress and
guiding corporate strategy, the pandemic revealed
some clear gaps. Many companies either didn't see the
early warning signs or focused too much on immediate
liquidity fixes. They didn't act until things were already
serious (Jacobson, 2024). This research focuses on how
different types of warning signs appear and which
strategies truly make a difference
—
especially in a
period as turbulent as 2020
–
2025.
2.4 Research Objective
This study aims to:
●
Find and list the most common operational and
financial warning signs that precede corporate
financial distress in U.S. corporations between
2020 and 2025.
●
Examine how these signs changed as the
economy and industries changed.
●
Analyze the impact of strategic responses and
distinguishing between short-term fixes and
sustainable strategies.
This research aims to show that companies can
overcome challenges by early identifying of internal
problems and quick action.
3. Methodology
A mixed-methods approach was used to understand
how often early warning signs (Tanaka et al., 2025) and
strategic actions happened in U.S. companies from 2020
to 2025. We examined various financial reports, industry
data, and information on bankruptcies and major
changes in companies. Publicly available information,
like annual reports and press releases, was analyzed to
find operational signals such as warnings about the
company's future, breaches of agreements, and
emergency cost cuts. General business health, including
default rates (Tron et al., 2022) and how different
industries were performing (Cornerstone Research,
2024), were verified using industry research. A review of
case reports and news stories was done to find trends in
strategic behavior (Younas & Durante, 2023).
Information from news and company reports was used
to sort strategic actions, like managing liquidity,
changing debt structure on the balance sheet, fixing
operations, and changing the company's market
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position. Results were analyzed by whether companies
successfully turned things around
—
avoiding bankruptcy
and making a profit again
—
or failed, such as by going
bankrupt or being bought when in trouble. All results
were presented together, with sources cited in APA
style. The study looked back at what happened, helping
to see which early warning signs and strategic actions
were most linked to good or bad results (Supangkat &
Widiana, 2022). While using public data might miss
some internal problems and not having a controlled
experiment limits proving cause and effect, the wide
range of data from different industries was a strength,
giving strong, comparative insights.
Figure 1. Flow chart representing research methodology
4. Operational Red Flags (2020
–
2025)
Methodology Flow Chart
Study Period (2020-2025)
Evaluate Outcomes
Key Findings
Data Collection
Identify Red Flags
Classify Strategies
Analyze with Mixed
Methods
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Figure 2.
The graph representing the common operation flags (Sandor, J., 2024)
4.1 Financial Warning Signs
From 2020 to mid-2025, U.S. companies were showing
signs that their problems went beyond just temporary
dips in demand. From 2020 to mid-2025, many U.S.
companies showed signs that their troubles were more
than just short-term drops in revenue. One key trend
was that some companies made enough money to pay
interest but constantly raised new capital from existing
investors to stay continue operations (Almeida, 2021).
When interest rates rose again in 2022
–
2023, these
companies had trouble paying existing interest
obligation, which implied they were not financially
stable. To avoid bankruptcy, many struggling companies
used methods like debt swaps and extending payment
deadlines (Sagita & Nugraha, 2022). By 2024, these
actions were the main reason for defaults, showing a
move towards using financial engineering as a survival
tactic. However, this facade of strength eventually
cracked. Corporate bankruptcy filings soared to levels
not seen in a decade, with nearly 700 companies filing in
2024 alone, proving that these maneuvers couldn't
sustain deeply indebted operations (CSC Global, 2025).
4.2 Operational and Managerial Red Flags
Beyond the company financials, problems could be seen
in how a company was running. If a company wasn't
putting money back into itself or keeping things in good
shape, that was a bad sign because it showed they were
just trying to survive day to day. Things like factories not
being used, workers being idle, orders not being filled,
or too much inventory meant that either people weren't
buying enough or the company wasn't planning well
(Saleheen & Habib, 2022). These issues caused liquidity
problems (Liu, 2024), in turn affecting the product and
operations quality which made customers unhappy.
Another sign was when many employees were leaving
(Anusha & Rajesh, 2024), especially important people
like the head of finances or the boss (Bae & Joo, 2021).
Often, when leaders left, the reason given wasn't the
real one; it was hiding bigger problems. Also, if the
quality of products or services went down, that was a
red flag because companies under pressure sometimes
tried to save money by cutting corners (Owusu & Goh,
2020). This led to customers complaining more,
returning products, or the government getting involved.
4.3 Sector-Specific Trends and Timing
Certain industries, such as oil, gas, and retail, faced a
considerable number of bankruptcies in 2020 as a result
of the pandemic, precipitated by events like the
plummeting of oil prices and extensive retail shutdowns
(Hamzah & Marimuthu, 2020). But for manufacturing
and services, problems took longer to appear, with
many failing in 2023 as government help stopped and
costs went up (Menezes & Lawless, 2023). The timing
and type of red flags, such as not meeting loan terms or
big drops in income, depended on the specific issues and
recovery paths of each industry.
Common Operational Red Flags
Source: Sandor, J. (2024).
Early identification of operational distress is key
.
Accounting
Today
.
https://www.accountingtoday.com
McClure, B. (2024).
Financial Ratios To Spot Companies in Financial Distress
.
Investopedia
.
https://www.investopedia.com
Harvard Business Review. (2019).
Why Good Companies Go Bad
.
https://hbr.org/1999/07/why-good-companies-go-bad
Empirical Consulting Solutions. (2024).
The Importance of Early Warning Systems for
Mid-Sized Companies
.
https://thinkempirical.com
85%
70%
65%
60%
50%
75%
Cash Flow Issues
Inventory Problems
Leadership Turnover
Declining Customer Satisfaction
Operational Inefficiencies
Excessive Debt
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4.4 Severity and Prevalence of Warning Signs
Not all warning signs carried equal weight. Some, like
minor revenue declines, were common and not always
fatal if addressed quickly. Others, though less frequent,
signaled acute risk. For instance, auditors’ going
-concern
warnings were rare but strongly predictive of
bankruptcy or major restructuring (John & Liu, 2025).
Correspondingly, entities demonstrating consistent
negative cash flow or habitual payment delays to
vendors faced a heightened risk of impending insolvency
unless prompt corrective measures were enacted
(Kovach et al., 2022). Figure 2 provides a conceptual
overview, highlighting that while widespread issues like
declining sales are important, rare but severe indicators
demand urgent intervention to prevent collapse (Tanaka
et al., 2025).
4.5 Importance of Early Detection
This analysis underscores the need for a balanced early
warning system
—
one that can flag both the common
issues that may escalate over time and the rare, severe
signals that require immediate attention (Tanaka et al.,
2025). By spotting these red flags early, companies and
those involved can act to keep things steady, get money,
and avoid bigger problems (Tanaka et al., 2025).
5. Strategic Responses to Financial Distress
Financial distress can lead to significant value loss for a
company and its stakeholders, hence preventing it are
crucial to prevent business disruption (Ashraf et al.,
2019). Table 1 shows a summary of the main actions
taken and their outcome.
5.1 Liquidity Management and Cost Restructuring
The first thing companies did was cut costs quickly
—
like
letting people go, reducing pay, and stopping
unnecessary spending
—
especially in 2020 and 2021
(CSC Global, 2025). This saved money but often made
workers unhappy and weakened the company. At the
same time, companies tried to get cash by using
available credit lines, delaying payments, and managing
liquidity. Many talked to lenders to get more money or
get more time to pay debts, which helped for a while but
didn't work as well when interest rates went up in 2023
(Almeida, 2021). Some companies couldn't fix the debt
burden and ended up filing for Chapter 11 bankruptcy.
5.2 Asset Divestment and Strategic Refocusing
To get money and work better, many companies sold
things that weren't essential or parts of the company.
This helped them concentrate on what they were best
at and pay off debt (Harrigan & Wing, 2021). When done
well, this improved profits and made the company
clearer. But, if they sold important things too quickly,
companies became too weak to recover, which made
them more likely to fail in the future (Aiyappa, 2025).
5.3 Digital Transformation and Business Model
Pivoting
The pandemic fast-tracked digital adoption. Companies
expanded
e-commerce,
revamped
distribution
channels, and repurposed assets to meet evolving
customer needs. These moves often unlocked new
revenue streams and boosted resilience. While not all
pivots
succeeded,
early
adopters
of
digital
transformation were better positioned by 2022
–
2023
and often embedded innovation into long-term strategy
(Hokmabadi et al., 2024).
5.4 Stakeholder Support and External Capital
In the absence of a convincing viability and turnaround
plan, secured lenders frequently initiate measures to
mitigate their exposure, such as implementing
borrowing-base blocks, instituting reserves, or reducing
caps, all of which tend to exacerbate the spiral into a
deeper liquidity crisis (Walsh & Sekely, 2019). However,
proactive engagement with all stakeholders, including
suppliers, employees, and customers, often yielded
crucial support, fostering a collaborative environment
essential for navigating distress (Walsh & Sekely, 2019).
5.5 Mergers and Acquisitions (M&A) as Exit or Rescue
M&A served as both a recovery tool and an exit strategy.
Stronger competitors acquired distressed firms to
preserve operations, while some pursued mergers of
equals to consolidate resources (García-Nieto et al.,
2024). Results varied: well-planned acquisitions often
led to turnarounds, but rushed deals between weak
entities failed to resolve underlying issues. Still, M&A
remained a practical path when standalone recovery
was unlikely. This is reflected in the comparative
outcomes listed in Table 1.
Table 1.
Strategic responses to financial distress (2020
–
2025) and their outcomes
Strategic Response
Description and Typical Outcomes
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Cost
Retrenchment
(Expense cuts, layoffs)
Immediate reduction of operating costs to conserve cash. Often successful short-term
in stemming losses, but can weaken future growth capacity if overdone. Necessary in
early crisis phase, though morale and innovation may suffer.
Debt
Restructuring
(Renegotiation, refinancing,
Chapter 11)
Reorganization of debt obligations to reduce near-term burden. When done out-of-
court, can lower interest or extend maturities, gaining runway. In court-supervised
restructuring (Chapter 11), debt is shed in exchange for equity. Successful cases
emerge leaner with sustainable debt; failures end in liquidation.
Asset Divestiture
(Sell-offs
of non-core assets)
Sale of business units, real estate, or IP to raise cash and focus on core operations.
Provides one-time liquidity and potentially sharper strategic focus. Outcome: positive
if core business stabilizes (firm survives smaller but healthier), negative if vital assets
are lost or proceeds insufficient to turn the tide.
Business
Model
Pivot
(Digital
transformation,
product/service innovation)
Adapting or reinventing operations to new market realities (e.g., shifting to e-
commerce, remote delivery, or new products relevant to pandemic needs). Companies
that successfully pivoted often tapped new revenue and improved efficiency, aiding in
recovery. Unsuccessful pivots consumed resources with little payoff. Overall, a
proactive pivot signaled resilience and was correlated with better performance post-
crisis.
External Capital Infusion
(Government
aid,
new
equity/debt capital)
Securing external capital was a key liquidity strategy. Government aid
—
such as PPP
loans in 2020
–
2021
—
helped avert immediate collapse for many firms. Equity
injections strengthened balance sheets but diluted ownership, while new debt offered
short-term relief at the cost of future obligations. Outcomes depended on how capital
was deployed: firms that used funds to restructure and adapt often stabilized, whereas
those that merely layered on debt frequently encountered renewed distress.
M&A and Consolidation
(Being acquired or merging)
Pursuing a sale, acquisition, or merger to capitalize on a stronger partner’s resources.
In an acquisition, the distressed firm’s stakeholders often take losses, but the business
itself may continue under new ownership (successful “rescue” outcome). Merger
s
between weak firms aimed to achieve economies of scale or complementary
strengths; some merged entities navigated the crisis better together, while others
failed if synergies did not materialize.
After the COVID-19 pandemic, companies often used a
mix of strategies (Heredia et al., 2022). They cut costs
while also trying to get more money (Ashraf et al., 2022).
Some changed how they were organized and adapted
their business plans to fit the new market. These
strategies worked best when started early as part of a
well-thought-out plan, instead of waiting until things got
really bad (Lorange, 2021). Companies that acted quickly
in mid-2020
—
by increasing their cash, reducing
expenses, and investing in digital technology (Browder
et al., 2023)
—
were in a better position by 2022
–
2023
(Heredia et al., 2022). Because they took action early,
they were able to keep their business stable (Heredia et
al., 2022) and in a better position as things improved.
But companies that waited, hoping things would go back
to normal quickly, often had to take more drastic
measures later, like selling off parts of the company or
declaring bankruptcy (Kang et al., 2020). The stock
market also showed this difference during the
pandemic. Investors reacted better to companies that
announced forward-looking plans, especially those
involving digital innovation and getting more money,
than to those using short-term, defensive methods
(Klöckner et al., 2023). This suggests that people saw
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long-term, well-rounded plans as a sign that a company would survive and do well (Klöckner et al., 2023).
Figure 2. Pie chart representing the effectiveness of intervention strategies (Walsh, M., & Sekely, C., 2019)
6. Conclusion
The period from 2020 to 2025 provided a critical test for
U.S. corporations, demonstrating that early operational
warning signs often presaged severe financial distress
and that the quality of strategic responses determined
ultimate outcomes (Tanaka et al., 2025). This study
identified core operational red flags
—
such as declining
revenues, persistent cash flow deficits (Karas &
Režňáková, 2020)
, rising leverage, and operational
inefficiencies
—
as reliable predictors of distress in the
post-COVID economy. Firms that promptly recognized
and addressed these indicators, by initiating targeted
interventions, exhibited a significantly higher likelihood
of survival (Tanaka et al., 2025). Conversely, companies
that delayed action or minimized these signals
frequently entered a downward spiral that proved
difficult to reverse.
The study found that how well companies responded to
the crisis depended on using several strategies together
in a timely way (Heredia et al., 2022). As detailed in Table
1, no single tactic was sufficient on its own; rather,
layered and timely interventions proved most effective.
Using just one method wasn't enough. Companies that
recovered typically combined different approaches
(Baliouskas et al., 2022). They first stabilized things by
cutting costs and changing their finances. Then, they
worked on improving their business by using new
technology (Rupeika-Apoga et al., 2022), changing their
business plans, or merging with or buying other
companies. Government support, like the Paycheck
Protection Program, was very important in helping
companies stay afloat during the worst part of the crisis.
This shows how important it is for the government and
businesses to work together. However, when this
support decreased in 2023
–
2024, whether a business
could succeed on its own became the most important
thing (Cornerstone Research, 2024).
In conclusion, the years 2020
–
2025 underscored that
spotting risks early and managing them head-on is vital
for operational and financial health. Companies that
combined financial analysis with up-to-the-minute
monitoring of things like customer trends, employee
morale, and supply chain stability were the ones that
could jump in and fix problems fast (Marjerison et al.,
2025). The best boards and leaders were those ready to
make quick decisions, balancing caution with the ability
to change, and working well with lenders, investors, and
government officials (Thorgren & Williams, 2020).
Companies that were open to new strategies and
worked with everyone involved were the ones that not
only survived but thrived (Browder et al., 2023). Moving
forward, organizations must integrate comprehensive
Effectiveness of Intervention Strategies
Source: Walsh, M., & Sekely, C. (2019).
How to Deal With the 5 Stages of Business
Distress
.
CFO.com
.
https://www.cfo.com/restructuring/2019/01/the-5-stages-of-business-distress
Harvard Business Review. (2021).
Turnaround Strategy: Lessons from Successful
Restructurings
.
https://hbr.org/2021/06/turnaround-lessons
McKinsey & Company. (2020).
When to Restructure and When to Transform
.
https://www.mckinsey.com/business-functions/transformation
Successful, 45%
Partially
Successful, 35%
Unsuccessful,
20%
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early warning systems that monitor both financial and
non-financial indicators, such as employee morale and
supply chain vulnerabilities, to proactively identify
nascent signs of distress (Jacobson, 2024).
This paper contributes a novel perspective by integrating
operational red flags with strategic response outcomes
across multiple industries and over a sustained crisis
period. Prior studies often emphasized either predictive
financial models or post-failure analysis in isolation. In
contrast, this study combines early detection with
forward-looking strategic effectiveness, offering a
holistic diagnostic framework. Moreover, unlike earlier
research limited to historical financial data, this work
incorporates real-time managerial signals and sector-
specific dynamics that emerged uniquely in the 2020
–
2025 context. The findings provide not just predictive
value but also prescriptive insights that are actionable
for both corporate managers and policymakers.
6.1 Key Findings
This study examined how U.S. companies responded to
distress between 2020 and 2025 and identified several
critical insights:
1.
Operational red flags
—
like executive turnover,
declining product quality, and rising inventory
—
often appeared before financial metrics signaled
distress (Bae & Joo, 2021; Owusu & Goh, 2020).
2.
Mixed-methods analysis
combining financial
data with qualitative reports gave a fuller view
of risk and response (Younas & Durante, 2023).
3.
Timing and strategy mix
mattered: early, multi-
pronged responses led to better outcomes than
reactive, single-track measures (Heredia et al.,
2022).
4.
Government aid helped temporarily
, but long-
term recovery required internal change and
adaptive leadership (Jacobson, 2024).
Strategic actions and their outcomes are summarized in
Table 1
, showing how certain approaches were more
effective depending on timing and execution.
6.2 Future Research
More studies are needed to create early warning
systems that use both how a business runs and its
finances. It would also be helpful to study specific
industries to understand their weaknesses. Finally,
future studies could look at how working together
affects how well companies recover from big problems.
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