The wave of insolvencies is coming – time to prepare

An article by Dr Christian Wurditsch, entrepreneur, investor, business angel

90-second facts (spoilers included)

• So far the wave of insolvencies has merely been postponed
• Everyone will be affected by it
• Immediate stocktaking of the cash position and the business model is called for
• The course must be set now to align the business model with the post-Corona era
• In the wave of insolvencies, ongoing cash flow planning becomes a standard activity for those running a company

Emergency stop caused by the economic lockdown

For many companies the lockdown was a forced emergency stop of their business operations. On the road, emergency stops can on the one hand prevent accidents, but on the other they can also cause follow-on collisions. Knock-on effects of this kind are becoming more and more visible in many companies’ financial figures.

The various sectors were and are affected differently by the pandemic measures and by the consumer behaviour that followed. But even within the same sector, the damage could be mitigated or absorbed to differing degrees depending on the company’s existing substance and the measures taken.

It is much the same on the road. There are drivers who drive with more foresight than others. Some are at the wheel of vehicles that are poorly maintained or overloaded. Others in turn benefit from the latest tyres or from technical innovations such as a brake assistant. At the same time, drivers – like those steering a company – are prepared for critical situations of this kind to differing degrees, depending on their experience of similar circumstances, driver training, education and previous positions.

Those running companies have dealt with the economic emergency stop in similarly varied ways and are now also continuing to act in correspondingly diverse fashion.

• Some mainly take the account balance as their speedometer and trust that everyone else will cope with the average speed of the traffic flow.
• Others rely mainly on the rear-view mirror, where their bookkeeper or tax adviser gives them a snapshot of the quarterly distance covered.
• Some company leaders, however, also actively make sure they manage their own payment flows for the coming months by drawing up cash flow plans and forecasts.

Why pay more attention to other companies now, and what has that got to do with cash flow?

Even if your own company is not itself directly part of a crisis sector such as tourism, automotive, retail, gyms and so on, the effects over the coming period can be significant. Even competitive companies can be threatened so directly – and indirectly – by the effects of serious natural events such as Covid-19 that they have to leave the market.

Because even if you have come through the emergency stop relatively unscathed, vehicles behind you can write off your own car because other drivers braked too late, were travelling at speeds inappropriate to the conditions or failed to observe the rules on safe distance. The same applies to the economic emergency stop we have just been through.

From competitive advantage to competitive disadvantage

For example, a software development company that was able to continue its development work even during the lockdown may be hit harder than others if a good part of its business has so far been commissioned by hotels and travel agencies.

A focus on one sector, which previously was a competitive advantage thanks to the specialist know-how acquired, can at a stroke become a competitive disadvantage or even a factor that threatens the company’s very existence. Since the effects on the individual sectors are not limited to one region but apply across regions, switching to other regions is not an option either. Consequently, if the previous business path is maintained, falls in revenue – and with them liquidity bottlenecks – are to be expected.

At some companies this has already meant that an insolvency petition was necessary, because applications for loans and support were rejected or because the managing director was not convinced that the company would survive.

Is a wave of insolvencies really to be expected?

Government measures such as the suspension of the obligation to file for insolvency, or moratoriums by tax offices and health insurance funds on bankruptcy petitions, have for the time being averted an immediate large wave of failures. For the time being.

But this is likely to have merely postponed corporate insolvencies. Numerous experts such as Dr Christian Gerloff (specialist lawyer for insolvency law, restructuring expert) and Thomas Kurz (commercial lawyer, insolvency administrator) expect a marked rise in corporate failures in autumn 2020. Here are a few comments:

“Personally, I expect more than 30,000 corporate insolvencies and an unemployment figure of between four and five million in the coming year”, Biner Bähr, (lawyer, insolvency expert),

“From autumn and into the winter, a further wave of insolvencies threatens. The funds do help to buy time, but in the long term they increase the level of debt. Not all companies will be able to carry this additional burden.” Rainer Eckert (insolvency administrator and restructuring expert),

“Many insolvency experts had already written off the protective shield procedure. Now we need it more urgently than ever, so that competitive companies do not have to leave the market because of the effects of serious natural events.” Tillmann Peeters, restructuring consultancy Falkensteg

According to assessments by Coface, an international network of experts in credit insurance and risk management, an increase in corporate insolvencies of plus 25 per cent is to be expected for 2020.

The western European economies (+18%) – Germany (+11%), France (+15%), the United Kingdom (+33%), Italy (+18%) and Spain (+22%) – would be less affected than the United States (+39%), but in general it will be a considerable challenge from which no sector will be spared.

What needs to be done? Take stock of your cash position!

The very first step – no matter how well or badly a company has come through the past months – is to get a picture of its current liquidity. That includes not only the current balance of the bank account but above all the open items for the next 3 to 6 months. This stocktaking is essential. Because in four out of five insolvency cases, inadequate management of liquidity is found to be a factor.

The business model before and after the Corona lockdown

In a second step you should question your own business model. The lockdown is not only an economic shock but above all a social one. Companies and private consumers alike had to change their behaviour. Some of these changes will become habitual behaviour. It is therefore worth considering how your own business model could be affected by this, both positively and negatively.

Anyone still in need of a concrete starting point would do best to tackle the subject of digitalisation. Numerous processes – prescriptions for medicines, job interviews, team meetings, school lessons – received a digitalisation boost within a few weeks that some had previously delayed, rejected or simply ignored.

Entrepreneurs and many managing directors are usually doers and have experience in overcoming hurdles.

They look for new market opportunities and seek ways to transfer specialist know-how and skills to other areas. This quality is in demand now and in the coming months. In the same breath, however, you must also ensure that the changes to the business model – whether forced or actively initiated – are backed up with figures. Because liquidity is just as necessary for every business and every organisation as oxygen-rich blood is indispensable for athletes, mountaineers and people in general.

On top of that, when looking at these figures for the coming months, any domino effects caused by the expected wave of insolvencies also have to be taken into account. Because in a wave of insolvencies, liquidity bottlenecks can work their way through several levels. If your own customers run into payment difficulties because other companies can no longer settle their invoices, that means stress for your own liquidity management.

Ongoing planning and monitoring – from optional to compulsory

It is appropriate to move on from the first step, “taking stock of your own liquidity”, to rolling liquidity management, so that this becomes at least a weekly must-do activity. Some people will immediately come up with the usual defensive reactions: “that takes too much time”, “it is not worth it”, “the quarterly reviews have been enough so far”, “the manual updating only worked for the first three times”, “it worked until the person in charge of the Excel file left the company”, and so on. These defence mechanisms are the product of real experience and are therefore legitimate. At the same time, however, no insolvency administrator, no investor, no supplier and no lender cares about them.

Because today there is another way. There are innovative tools for cash flow planning and management that support you just as well as the brake assistants, lane assistants and so on in modern vehicles. COMMITLY is one such intelligent assistant for companies and managing directors. A liquidity plan can also help to keep managing directors from sliding into personal liability.

So push the usual defensive reactions and excuses aside and keep your company on track with modern assistants such as COMMITLY. Because it is not only for cars that the roads will become slippery and challenging in autumn 2020.

Credits: Photo by Mika Baumeister on Unsplash