What to do about unexpected financial bottlenecks? (Quora)

(This article first appeared on Quora Germany.)

I was CFO at a real estate company and was on holiday when I received a message from one of our portfolio companies: URGENT – Turkish tax office demanding €25m in back taxes (€12.5m regular and €12.5m penalty). Claim unfounded. Urgent shareholders’ meeting convened!

That was completely unexpected and in no way planned for. I choose this example because at the time the size of the claim was in no way covered by our liquidity. For small companies, amounts of €25,000 can already lead to comparable situations.

Without going into the example any further, here are my thoughts on the question:

(A) In a situation like this, the cash flow plan (liquidity plan) is your best friend.

We prefer the direct method of determining cash flow. It is divided into 3 broad groups: (1) operating cash flow, (2) cash flow from investing and (3) cash flow from financing. The three groups are at the same time the fields for action. Cool, isn’t it?

(1) Operating cash flow

Check every cash in item for risks and for ways of optimising incoming payments. A common optimisation in this context is factoring, for example. Christian Kedzierski listed the options fairly comprehensively in his answer. For the cash out items, check whether payments could possibly be made later.

(2) Cash flow from investing

Now is the moment to stop any investment – where possible – and postpone it to a later date, AND to check whether assets such as land and the like can be sold. (usually the last resort)

(3) Cash flow from financing

The glimmer of hope on the horizon. External money – from banks or from the shareholders / investors! The cash flow plan now unfolds its full potential. Not only can you give an external lender a precise overview of the state of the company, at the same time you also have a highly professional package of measures that you can present (see points 1 and 2).

(B) Communication with the stakeholders

This is important! Liquidity bottlenecks can always occur and are usually not a sign of failure. They become a failure if they are not handled cleanly and objectively. The second step, after putting the problem on an objective footing (see A), is therefore to approach all the company’s important stakeholders. These are usually the owners/investors and the house bank. The cash flow plan and the documentation of the possible actions now serve as the basis for the discussion. Highly professional!

(C) Have the legal consequences examined

An unexpected financial bottleneck can, however, also lead to insolvency. The managing director must always check whether the ground for insolvency known as inability to pay applies. Inability to pay exists when the company is not in a position to settle its due liabilities and is not likely to be able to obtain the necessary funds in the near future. The German Federal Court of Justice has set that period at a maximum of three (!) weeks. Inability to pay is a sharp sword, and while the demise of a company is not a pleasant thing, taking too relaxed an approach to financial bottlenecks can become a threat to its very existence.

Back to our portfolio company. The tax audit at that time was an operation by the Turkish government against foreign – above all German – companies. We revised our cash flow plan within 24 hours, scheduled an extraordinary supervisory board meeting, brought in external lawyers and drafted an ad-hoc announcement. We were able to reduce the back tax payment by 80%.

Here is the original question on Quora

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