You suffer a large bad debt that takes £60,000 out of your cash flow. Of that £60,000 perhaps £10,000 would be profit - that's what you have lost, but you're also not going to get the £50,000 you need to pay
the suppliers who sent in goods worth £30,000 and the £20,000 of bank overdraft used to pay wages and overheads. The business is still profitable and sales are holding up. The bank won't increase the facility and now wants the overdraft reduced by £15,000 before the next review( in 3 months time), because it's become nervous.

What do you do?

The only way you can pay the creditors is by generating profit from the future sales. It will take 4 months to make that amount of profit (£30,000) and 2 months to make enough profit to reduce the overdraft by £15,000.

If you were to propose to your creditors who are owed, say, £200,000 in total, that they accept 75% of their debt being payable on the normal due date and the remaining 25% being paid in 6 months time, then you would immediately save £50,000 out of the cash flow and that would satisfy the bank's demands. In 6 months time you would have generated enough cash from profits to pay the creditors and you would have survived a £50,000* "hit" - company rescue accomplished.

You might even get the creditors to accept 62.5% of their debt on normal terms with 25% deferred for 6 months and the balance being written off. That would mean that instead of losing £50,000 on the transaction you would only lose £25,000 and the whole loss of £50,000 would have been shared with your creditors.

*£60,000 - £10,000. The £10,000 profit doesn't count in this calculation.