Constant evaluation of key figures is the responsibility of the management
Specialist articles by Alexander Eichner, MittelstandsWiki, 12.09.2014
Even the healthiest business can get into financial difficulties. Even market and branch leaders, who have never before seen their existence at risk, are not immune to such situations. The causes differ enormously. Here in Germany such existentially threatening crises are usually triggered by strategic misjudgments on the part of management or shareholders, changes in branch or market structures, acquisition of the wrong companies and their inadequate integration, payment defaults, liquidity problems and excessive debts.
Early-warning indicators from the controlling department
These triggering factors will always exist and cannot be prevented completely. But it is important to recognize early on that a company is heading for insolvency. What is absolutely essential in any early-warning system, is a functioning financial controlling mechanism, since the most significant early indicators are key business figures, such as turn-over, profit margin, return on investment, equity capital as well as credit losses, costs, liabilities and existing orders.
The level of liquidity is crucial, showing how long the financial resources will suffice, funds meant to meet payment obligations of the company over a specific time period. Another important indicator is capacity utilization or indeed non-utilization of the company’s material and human resources.
Beyond the day-to-day business
This may seem to many to be just a series of platitudes, but in every company these figures should indeed be available and regularly updated, as well as being carefully monitored. In practice, however, the situation is usually quite different, where those responsible in the company are constantly busy dealing with urgent operative matters and the evaluation of costs and financial planning is left to a single individual employee. However, since strategy is a matter for the management, so too should controlling be a management responsibility.
This, of course, does not mean the actual updating of the figures, but the evaluation of the figures. To be able to do this sensibly, all entrepreneurs should take the time for this purpose regularly once a month – establishing as it were a controlling jour-fixe.
Crisis phases prior to insolvency
Generally there are three crisis phases leading up to an insolvency situation:
- strategy crisis
- crisis through lack of success
- liquidity crisis
The fact that a business is in difficulties is often only recognized by the company owners, once they have reached the liquidity crisis stage, when, for example, the company is only able to receive goods after advanced payment or must take a fall in prices due to increased competition. Then it is only too often already too late. Failure to cover costs, excessive debts and unsustainable operative losses lead to failure to meet payment obligations and therefore to insolvency.
Conclusion: Follow a policy and counteract
The entrepreneur who regularly checks his most important figures, will recognize a crisis in time, and can implement countermeasures. In certain circumstances it is sensible to call in an external expert as advisor. There are many experienced crisis managers available. Often your bank can recommend two or three consultants, with whom other company clients have had good experience.