A contribution by Wolfgang Pones, Co-Founder COMMITLY

Fact box for those in a hurry: Planning, not only in the event of a crisis

• If the insolvency petition is not filed in time, the managing director can be prosecuted under criminal law for delaying insolvency!
• It is not an indication of insolvency that suppliers are already knocking on the door like crazy.
• In the restructuring process itself, the entrepreneur is closely controlled by the insolvency administrator and the creditors' committee.
• The combination of short-term and medium- to long-term Cash flow planning ensures a high level of transparency and close control of business development.
• A company's own precise and realistic planning generally strengthens the confidence of the financing agencies in the company.

Wolfgang Pones, co-founder of COMMITLY, has many years of experience in the financial management of small and medium-sized companies. Over the past 20 years, he has also been involved in several restructuring processes as a consultant and managing director. In addition to his experience, his studies at the Juridicum in Vienna and his training as a tax consultant have also helped him. Here he gives us an insight into the reasons for restructuring proceedings and the importance of Cash flow planning and monitoring in these challenging times.

Reasons for a restructuring procedure

Restructuring proceedings may become necessary if the company is no longer able to pay due payment obligations. Christian Kedzierski goes into detail on this topic in this guest article. What sounds so unspecific has massive significance for the representative bodies, i.e. the managing directors of a company. Insolvency, i.e. the inability to pay due invoices, occurs more quickly than one might think. Especially in Germany.

The Austrian Supreme Court defines and interprets § 66 of the Insolvency Code as follows: Insolvency occurs when the debtor cannot pay 5% of his due debts as soon as possible. Immediately is interpreted as a maximum of 3 months.

In connection with § 17 InsO, the German Federal Supreme Court (BGH) defines a payment stagnation of a maximum of 21 days (!), i.e. only 3 weeks. If the funds can be procured within 3 weeks to meet all payment obligations, there is no insolvency.

If insolvency exists, the managing director must file for insolvency. As part of the application, reorganisation proceedings may be requested. The various possibilities of the procedure will not be discussed further here. Only one thing is important: If the application for insolvency is not filed in time, the managing director can be prosecuted under criminal law for delaying insolvency!

And another clarification that is very important for everyday business life: the entrepreneur must regularly monitor solvency. It is not an indication of insolvency that suppliers are already knocking on the door like crazy. That would rather be an indication of a possible delay in insolvency.

Insolvency law and Cash flow planning

Capital requirements and the short-term Cash flow planning are of great importance, not only in everyday business life, but also on the basis of the legal foundations of the Insolvency Code, at least for the duration of the restructuring process.

From my experience as a managing director in restructuring proceedings, it is usually in the nature of things that planning and liquidity tools are only available to a limited extent. However, in the insolvency proceedings in particular, in addition to a short-term overview of business development, a Cash flow planning must first be prepared on a weekly basis, taking into account the specific circumstances of the proceedings.

In addition, the planning usually has to be compared with current developments at least once a week and the planning updated. For the process itself, it is recommended that a medium to long-term Cash flow planning is also drawn up at the beginning, which is also updated on an ongoing basis.

Insolvency administrator and creditors' committee

In the restructuring process itself, the company and thus the entrepreneur are closely controlled by the insolvency administrator and the creditors' committee. It is not uncommon for an external advisor to be called in as well.

The combination of short-term and medium- to long-term Cash flow planning gives the management, the insolvency administrator and the creditors' committee a high degree of transparency and close control over business development.

These documents are not only requirements on the part of the legislator in the sense of the Insolvency Code, but also subsequently (after the positive conclusion of the restructuring process) a helpful basis for further developing internal company instruments that can depict the ongoing and "vital" monitoring in the company.

Restructuring concept = concept for the future?

A realistic and modelable Cash flow planning is particularly useful for developing future concepts, which can be of great importance even at the start of the restructuring process and which must be included in the insolvency plan, in order to demonstrate potential returns.

As an often necessary and also desired side effect, Cash flow planning also becomes an important basis for a sales process following the restructuring process. In the course of due diligence carried out by potential buyers, planning in combination with a liquidity analysis is an absolutely necessary and, in the event of proper execution, thoroughly beneficial instrument for the sales process.

The restructuring plan should also be reflected in a comprehensive restructuring concept or an even more long-term restructuring concept. This forms the basis for creditors to decide how much money they will receive (quota). For shareholders and investors, the restructuring plan provides an overview of a feasible restructuring path and possibly a successful sale of the company.

The role of the rehabilitation department

Last but not least, Cash position must be precisely planned, monitored and, if necessary, adjusted in crisis situations. Financial institutions and their restructuring departments usually require the company's own data to be monitored in advance in collaboration with external consultants. However, externally prepared planning can never be a basis for the development of your own company.

A company's own precise and realistic planning strengthens the confidence of the financing agencies in the company in this phase.

This trust can subsequently lead to a stable and successful resolution on the way through the restructuring process. Above all, decisions are made more fact-oriented. Often, alternative forms of financing (e.g. factoring) are introduced through the concrete demonstration of financial consequences, which are then used in the company beyond the proceedings.

Lack of internal instruments

However, in most cases, especially for companies facing the challenge of restructuring measures in general, not only external reasons, such as a changed market situation or outdated technical framework conditions, but also a lack of internal processes or instruments are responsible for the liquidity situation. Therefore, the company's internal preconditions are usually reduced to information from the accounting department. And in the worst case, because it is the most cost-intensive and above all the slowest, even from external accounting.

However, bookkeeping in particular is by no means a substitute for ongoing liquidity accounting or even planning.

As a rule, the data is only available with a time delay - in the case of external support even with a considerable time delay - and thus cannot be used at all for corporate planning and management. At this point, short-term liquidity and medium-term planning must therefore be set up immediately and, above all, maintained on an ongoing basis.

As already mentioned above, this step lays the foundation for confidence-building and legally prescribed steps both in the "preliminary stage", usually via the restructuring departments of the financial institutions, and subsequently in the proceedings themselves. Almost always, the financing institutions are not only an essential part of the quota in the creditor area, but also an important partner beyond the positively completed proceedings.

This "partnership" can be massively strengthened by appropriate planning and liquidity instruments, whereby the "matter of course" in dealing with these instruments must also be lived forcibly in the company and integrated into processes.

Depending on the size of the company, this responsibility either lies directly with the management/owners or must be integrated as a process in the structure of the finance department. Such a self-evident approach to planning and Cash position makes it easier for the company to deal internally with external consultants called in by the bank or in preparation for the restructuring process. It should not go unmentioned, however, that this support comes at a price, which further exacerbates the cost situation in an already tense period.

Planning, not only in the event of a crisis

Through the combination of internal and external expertise and practice, planning and liquidity instruments can be developed for the company in a crisis situation, which will be of great benefit in the future and if the restructuring measures are concluded positively. In my view, the use of these instruments must be unconditionally demanded by the management beyond the (extra-)judicial restructuring period.

Even in the event of a sale of the company by the shareholders - often a common "emergency solution" in the course of restructuring - the necessity and benefits of a sensible Cash flow planning.

Credits: Photo by Clem Onojeghuo on Unsplash