A guest article by Christian Kedzierski, CTO, firma.de
There are many reasons for a company's insolvency. For example, insolvency is said to be imminent if more than 90% of the invoices incurred can no longer be paid. Other causes of corporate insolvency are over-indebtedness and insolvency. These are triggered by one or more of the following causes:
Cash-reducing factors:
- Unsound financing
- Deteriorating payment behaviour of customers
- Insufficient coverage of operational risks
- Economic crises
- Bankruptcies of customers/suppliers
In a company, Cash position / cash flow is of the utmost importance. This ensures constant solvency. After a service has been provided, an invoice must be created and sent immediately; after 14+ days in arrears, the first friendly payment reminder should be sent.
Cost-increasing factors:
- Increase in personnel costs
- Bad planning for investments
- One-sided dependence on suppliers
- Increase in bank interest rates
- Incorrect stockpiling
When preparing the financial plan, it is important to take unforeseen events into account. In principle, one can increase all investments to be made that concern the foundation by 10%, since experience has shown that there can be slight fluctuations in costs during the realisation phase. Furthermore, it is recommended not to bind oneself to only one supplier. Because of this monopoly position, the supplier is in a position to set prices as he wishes. Insufficient or excessive stockpiling can also trigger insolvency in the long term. Therefore, make sure that you base your stockpiling on your target turnover.
Turnover-reducing factors:
- Lack of competitiveness
- Problems with order processing
- Offers of non-marketable products or services
Your success can be measured by your turnover. You should regularly conduct price research with competitors to optimise your pricing. You should also pay attention to service, quality and speed of delivery. Furthermore, it is important to immediately part with goods that are no longer marketable.
Leadership tools:
- Inadequate corporate planning
- Poor corporate governance
- Adverse private circumstances
A fundamental factor for the success of a business is the personal qualification of the founder. He or she must know his or her strengths and weaknesses and basically be a commercial expert. Business management knowledge is of elementary importance here. An entrepreneur must immediately invoice for services rendered. In everyday life, however, it is quite common for this obligation to be neglected and for new orders to be accepted rather than completed ones to be invoiced.
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 of all industries in all workflows with a clear mission: to enable young start-ups to get off to a fast, secure and cost-effective start. Among other things, firma.de offers the possibility to take over the entire accounting by means of outsourcing. Read more here.
Source: This post first appeared on Quora Germany. Quora Germany, "What are the biggest causes of insolvency?"
Credits: Photo by Bernard Hermant on Unsplash
