A contribution by Dr Christian Wurditsch, entrepreneur, investor, business angel

90-second facts (spoilers included)

• The wave of insolvencies has so far only been delayed
• Everyone will be affected
• Immediate location determinations regarding cash status and business model are required
• The course must be set for aligning the business model to the post-Corona era 
• In the wave of insolvencies, the ongoing Cash flow planning becomes a standard activity for company managers  

Full braking through the economic lock-down

For many companies, the lock-down was a forced emergency braking of their business operations. On the one hand, full braking in road traffic can prevent accidents, but on the other hand it can also lead to consequential accidents. Such consequential effects are becoming more and more visible in the financial figures of many companies. 

Different industries were and are affected differently by the pandemic measures and subsequent consumer behaviour. However, even within the same industry, damages could be mitigated or absorbed differently depending on the existing substance of the company and the measures taken. 

The situation is similar in road traffic. There are drivers who drive with more foresight than others. Some drive vehicles that are poorly maintained or too heavily loaded. Others benefit from the latest tyres or technical innovations such as a brake assistant. At the same time, car drivers as well as company drivers are differently prepared for such critical situations due to their experiences from similar circumstances, driving training, education, previous positions. 

The company leaders have dealt with the economic slam on the brakes in similarly different ways and are now continuing to act in correspondingly diverse ways. 

• Some mainly take the account balance as a speedometer and trust that everyone else can cope with the average speed in flowing traffic.  
• Others rely mainly on the rear-view mirror, where your accountant or tax advisor gives you a snapshot of the quarterly distance travelled. 
• However, some business leaders also actively manage their own cash flows for the coming months by creating liquidity plans or forecasts. 

Why pay more attention to other companies now and what does that have to do with cash flow? 

Even if one's own company does not directly belong to a crisis sector such as tourism, automotive, retail, fitness studios, etc., the impact can be significant in the near future. Even competitive companies can be so directly and indirectly threatened by the effects of serious natural events such as Covid-19 or Corona that they have to leave the market. 

Even if you have managed the emergency braking smoothly, following vehicles can cause total damage to your own car because other drivers braked too late, were travelling at speeds that were not appropriate under the circumstances or did not observe the distance rules. The same must also be taken into account with regard to the economic emergency braking suffered. 

From competitive advantage to competitive disadvantage 

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

A focus on a sector that was previously a competitive advantage due to the special know-how acquired can become a competitive disadvantage or even a factor threatening the existence of the company at a stroke. Since the effects for the individual sectors are not regionally limited but apply supra-regionally, it is also not possible to switch to other regions. Consequently, if the previous way of doing business is maintained, declines in turnover and thus liquidity bottlenecks are to be expected. 

For some companies, this has already resulted in the need to file for insolvency because applications for loans and aid were rejected or the managing director himself was not convinced of a positive continuation of the company. 

Is a wave of insolvencies really to be expected? 

Government measures such as the suspension of the obligation to file for bankruptcy or moratoriums on bankruptcy applications by tax offices and health insurance funds have averted an immediate wave of bankruptcies for the time being. For now.

But corporate insolvencies have probably only been pushed back in time as a result. Numerous experts such as Dr Christian Gerloff, (specialist lawyer for insolvency law, restructuring expert) and Thomas Kurz (business lawyer, insolvency administrator), expect a significant increase in corporate bankruptcies in autumn 2020. Here are a few comments:

"Personally, I expect more than 30,000 business insolvencies in the coming year and an unemployment rate between four and five million", Biner Bähr, (lawyer insolvency expert),

"From autumn and in winter, there is then the threat of another wave of insolvencies. The funds help to buy time, but in the long run they increase the debt level. Not all companies will be able to bear 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 exit the market due to the effects of serious natural events." Tillmann Peeters, Restructuring Consultancy Falkensteg

Assessments by Cofacean international network of experts for credit insurance and risk management, an increase in corporate insolvencies of plus 25 percent is to be expected for 2020.

This would affect the Western European economies (+18%) - Germany (+11%), France (+15%), the United Kingdom (+33%), Italy (+18%) and Spain (+22%) less than the United States (+39%), but it will generally be a significant challenge from which no industry will be spared.

What is to be done? Cash-like location assessment!

The very first step, regardless of how well or poorly a company has performed over the last few months, is to get an overview of the current Cash position situation. This includes not only the current status of the bank account, but above all the outstanding items for the next 3 to 6 months. This assessment is essential. Because in four out of five insolvency cases, inadequate management of Cash position is identified. 

Business model before and after corona lock-down

In a second step, one's own business model should be questioned. The lock-down is not only an economic but also a social shock. Companies and also private consumers had to change their behaviour. Some of these changes will become habitual behaviour. It is therefore necessary to consider how one's own business model could be affected both positively and negatively. 

If you still need a concrete starting point here, the best thing to do is to take up the topic of digitalisation. Many processes, such as the prescription for medicine, job interviews, team meetings, school lessons, received a digitalisation boost within a few weeks, which was previously delayed, rejected or simply ignored by some.  

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

They are looking for new market opportunities and ways to initiate the transfer of specialist know-how and expertise to other areas. This quality is in demand now and in the coming months. At the same time, however, it is also important to ensure that the forced or actively initiated changes to the business model are backed up with figures. After all, Cash position is just as necessary for every company and every organization as oxygen-rich blood is indispensable for athletes, mountaineers and every human being in general. 

In addition, when looking at these figures for the next few months, any domino effects due to the expected wave of insolvencies must be taken into account. This is because liquidity bottlenecks can affect several levels in the event of a wave of insolvencies. If one's own customers experience payment difficulties because other companies can no longer settle their invoices, this means stress for one's own liquidity management.  

Ongoing planning and monitoring - from freestyle to duty

It is advisable to convert the first step of "determining the status quo with regard to your own Cash position" into rolling liquidity management so that this becomes at least a weekly must-do activity. Some people will immediately react with the usual defenses: "it takes too much time", "it's not worth it", "the quarterly discussions have been enough so far", "manual updating only worked the first three times", "it worked until the responsible Excel operator left the company", etc. These defense mechanisms are based on real experience and are therefore legitimate. At the same time, however, no insolvency administrator, no investor, no supplier, no lender is interested in this. 

There are other ways of doing things today. There are innovative tools for Cash flow planning and control that provide the same level of support as the brake assistants, lane assistants etc. in modern vehicles. COMMITLY is one such intelligent assistant for companies and managing directors. A Cash flow plan can also help prevent managing directors from slipping into private liability. 

So push aside habitual defences and excuses and keep your business on track with modern assistants like COMMITLY. Because the roads will not only become slippery and challenging for cars in autumn 2020. 

Credits: Photo by Mika Baumeister on Unsplash