Guest article: What can lead to insolvency?

A guest article by Christian Kedzierski, CTO, firma.de

The causes of a company insolvency can be manifold. Insolvency is already considered imminent when more than 90% of the invoices due can no longer be paid. Further reasons for a company insolvency are over-indebtedness and inability to pay. These are triggered by one or more of the following causes:

Factors that reduce liquidity:

• Unsound financing
• Deteriorating payment behaviour of customers
• Insufficient cover for operational risks
• Economic crises
• Bankruptcies of customers/suppliers

In a company, liquidity / cash flow is of the utmost importance. It guarantees continuous solvency. Once a service has been provided, an invoice must be created and sent immediately; after 14+ days of late payment, the first friendly payment reminder should follow.

Factors that increase costs:

• Increase in personnel costs
• Poor investment planning
• One-sided dependence on suppliers
• Increase in bank interest rates
• Incorrect stockholding

When drawing up the financial plan, the unforeseen has to be taken into account. As a rule, you can increase all the investments to be made in connection with the start-up by 10%, because experience shows that costs can fluctuate slightly during the implementation phase. Furthermore, it is advisable not to tie yourself to just one supplier. This monopoly position puts the supplier in a position to set prices as it pleases. Insufficient or excessive stockholding can also trigger insolvency in the long term. Therefore make sure that you align your stockholding with the planned turnover you are aiming for.

Factors that reduce turnover:

• Lack of competitiveness
• Problems with order processing
• Offering products or services that are not marketable

Your success can be measured by turnover. You should regularly research your competitors’ prices in order to optimise your pricing. You should also pay attention to service, quality and speed of delivery. It is also important to dispose of goods that are no longer marketable immediately.

Management instruments:

• Inadequate corporate planning
• Deficient corporate management
• Adverse private circumstances

A fundamental factor for the success of a company is the personal qualification of the founder. They must know their strengths and weaknesses and basically be a commercial professional. Business administration knowledge is of elementary importance here. An entrepreneur must invoice services rendered without delay. In everyday life, however, it can certainly happen that this duty is neglected and that new orders are accepted rather than completed ones invoiced.

Once again in conclusion:

Cash flow planning and very good accounting are incredibly important.

About Christian Kedzierski

Christian Kedzierski is CTO at firma.de. firma.de supports founders from all industries with all their workflows and has a clear mission: to enable young start-ups to get going quickly, safely and cost-effectively. Among other things, firma.de offers the option of taking over the entire accounting through outsourcing. More about this here.

Source: This article first appeared on Quora Germany. Quora Germany, “What are the biggest causes of insolvency?”

Credits: Photo by Bernard Hermant on Unsplash