Insolvency: "A crisis is a race against time and money"

The way in which corporate crises unfold varies greatly. However, the reasons that lead to insolvency are often similar. Our interim manager knows how companies in crisis can achieve a turnaround and why every day counts.

Let's not kid ourselves. The crisis is here. Almost every day there is new bad news about companies in difficulties. But what exactly are the most common reasons for corporate crises?

Interim Manager: Corporate crises are very individual. No two are the same. But when it comes to the causes, there are indeed similarities. This is because there are usually technological, economic or strategic reasons for crises.

Let's start with the technological causes.

IM: Let's look at the topic of electromobility, for example. The drive technology of the combustion engine, which has been perfected over decades, is useless for electric cars. These vehicles do not need components such as catalytic converters and exhausts. The number of components installed is reduced by around 90 percent. Not to forget: the customer. Demand for electric cars is declining in this country. And electric cars from German manufacturers are too expensive compared to suppliers from the USA and the Far East. They are also technologically inferior. Other factors that are depressing demand are concepts such as car sharing, the lack of parking spaces in city centers and the fact that cars are no longer a status symbol for many people. Even working from home plays a role: since corona, many people have been able to work from home. We are on the road less. So there is less wear and tear on cars. And there are fewer accidents.

All of this is causing problems for manufacturers and suppliers alike. A number of suppliers have already filed for bankruptcy. What many do not suspect: Manufacturers of seats and lights also have massive problems. This is because they have built up massive overcapacity during the boom years. However, the large European corporations with extensive car fleets are now demanding less.

We are also lagging behind when it comes to digitalization. Of course, companies could invest in software and digitize their processes. But that alone is not enough. Staff must be able to work with the new digital solutions. Companies must enable employees to use efficiency-enhancing tools - which in turn costs money and time. Especially as business has become much more fast-paced due to digitalization. Whereas technologies used to have a lifespan of decades, today it is a maximum of five years. Companies must therefore not only upgrade technologically and professionally - on an ongoing basis - but also establish a mindset that recognizes change as a constant. This is the only way we can gradually close the gap.

What are the economic reasons for this?

IM: It's worth taking a closer look at energy-intensive industries. Manufacturing steel, cement, porcelain and petrochemical products consumes a lot of energy. Since the start of the war in Ukraine, we no longer purchase gas from Russia. As a result, energy prices have risen sharply. It was hardly possible to offset this with cheap electricity due to the nuclear and coal phase-out. It was also impossible to quickly adapt complex production processes. You can't simply shut down a plant. A blast furnace takes days or even weeks to cool down. Generally speaking, if individual cost types rise exponentially, this can plunge companies into a crisis. However, the overall economic situation must also be taken into account. In times of depression, there are more company bankruptcies.

Can't it also happen that companies make strategic mistakes that ultimately lead to a tangible crisis?

IM: Of course mistakes happen, that's clear. Succession planning is a very critical factor. Many managing directors who have passed the age of 60 are fit and energetic. But when they ask their bank for loans for sensible and necessary investments, they are often turned down. Why? Because they have not sorted out their succession. Nobody will lend money to a company if it is not clear who will be running it in ten years' time. That's why I advise entrepreneurs to take care of their succession early on - around two to three years before they leave. Along with the management, the workforce must also be rejuvenated. It is often the case that the staff ages with the boss. When he or she hands over the baton to the next generation and the employees gradually retire, there is nothing left to manage. Two things are needed to prevent a crisis: succession planning and active recruiting.

How do companies recognize an impending crisis?

IM: First of all, companies need to know their situation. That may sound banal, but it's not. Time and time again, I see companies forgoing holistic risk management and failing to keep an eye on their key figures. However, they need to know what one-sided dependencies exist, whether they generate a large part of their turnover with just a few customers, which suppliers they source from and whether this could be critical - see Russian gas -, whether they operate sites in geopolitically unstable regions, whether they are adequately hedged against exchange rate risks, whether they will have to pay additional or higher customs duties in the future and so on. If you do not monitor which risks are imminent and where your business is heading, you cannot proactively counteract negative developments. It is therefore essential to continuously monitor the most important KPIs and to check on a monthly basis whether the actual status still corresponds to the planned target. In my experience, this happens far too rarely - whether you are a medium-sized company or a group. It is often not until the annual financial statements that it becomes apparent that the figures are not correct. By then, however, it may already be too late.

Which key figures allow conclusions to be drawn about an impending crisis?

IM: There are two developments in particular that indicate a crisis: Sales are falling significantly. And prices are falling. Both can happen if customers can get the same product or service cheaper and/or better from the competition.

What can companies do to avert the crisis after all?

IM: Firstly, companies need to drastically reduce costs. There is no way around this. It is almost impossible to start with fixed costs because companies have no direct influence on them - just think of the operation of highly complex systems. Even if car manufacturers close plants, the immensely high fixed costs for the remaining factories and salaries remain. And even a closed plant continues to generate costs. That leaves the variable costs. Tweaking these usually brings initial success. But sometimes the effect is simply not big enough.

On the other hand, companies in crisis are called upon to drive transformation - whether they are automotive groups, manufacturing or pharmaceutical companies. If we - and by that I mean the German economy - don't do this, there will soon be nothing left to transform. Companies must develop products that generate demand. They need to push into new markets or even open up completely new business areas. And they need to upgrade so that they are fit for the future. Of course, this costs a lot of money. The necessary capital can come from shareholders or external investors. What often stands in the way of this is that the specialist staff are not sufficiently qualified for the new tasks. A vicious circle. Companies slide deeper and deeper into crisis - until they end up in a liquidity crisis that often ends in insolvency.

"We have rested on our wealth and put on fat. But the flab has to go. We need to challenge ourselves again and reactivate our inventive spirit."

You mention the different phases of corporate crises. Until when does it actually make sense to initiate countermeasures?

IM: Companies that are in a strategic or performance crisis have a good chance of overcoming it. The situation is different if companies have already lost their liquidity. In general, the further the crisis progresses, the less room for maneuver there is, while the need for action increases. And the more intense the crisis, the more difficult it becomes to obtain capital. That's why entrepreneurs need to know exactly How much money do I need? What do I want to do with the money? How quickly can I pay it back? Potential investors - just like other stakeholders - expect honest answers to these questions.

In general, openness and honesty are essential when the parties involved agree to save the company. It is important to boldly put your finger in the open wound. In case of doubt, this means saying goodbye to decades of tradition - which can be very painful. But there is absolutely no getting around it. Clinging dogmatically to outdated habits has often led to a crisis. That's why management also needs to change - in terms of personnel and strategy. Everything really needs to be critically reviewed, a customized restructuring concept developed and suitable measures introduced. And, of course, maximum transparency is required - both in terms of analyzing the causes and reviewing the measures introduced. Transparency forms the basis for trust. In a people business like crisis management, trust is the be-all and end-all. Whoever manages the crisis: this person must have the support of all internal and external stakeholders. After all, they are the ones who have to support the changes - including financially.

A crisis costs money. We must not fool ourselves. Disinvestments such as special write-offs, early repayment penalties for current financing and the like cost money. A reduction in staff and the associated redundancy payments cost money. These are just two examples of downsizing costs that arise in the event of a crisis. At the same time, companies can increase their liquidity and working capital by selling parts of their assets. They can then invest the funds raised in modern technologies and qualified employees. These are the set-up costs. If these two types of costs are badly balanced, it will be difficult to convince investors of the benefits of restructuring. And without financial resources, it is practically impossible to initiate countermeasures.

And insolvency is inevitable?

IM: Yes, this is often the case. However, there are different types of insolvency. There is the threat of insolvency, actual insolvency and over-indebtedness. The latter is accompanied by negative equity, i.e. losses from the operating business. Either way, companies must act immediately. If companies do not take effective measures in the event of imminent insolvency or over-indebtedness, they will go bust. And even then, the management has no time to lose. They are legally obliged to report the insolvency. Otherwise they are liable to prosecution. It is crucial not to miss the right time to file for insolvency.

What happens afterwards?

IM: What happens next is no longer the responsibility of the management. This is because an insolvency administrator takes the helm. He first gets an overview of the company's situation and decides whether and how to proceed. If he considers it sensible to continue business operations, he usually starts with the variable costs: One of the first measures is usually to discontinue much-loved special benefits for employees and, if necessary, to lay off part of the workforce. This is often followed by the sale of individual company divisions or unprofitable locations to strategic or financial investors. In this way, companies increase their liquidity in the short term and get rid of unprofitable cost drivers. If such a carve-out is unsuccessful, the insolvent company is usually wound up and disappears from the market.

What role do external restructuring consultants play in all of this?

IM: A corporate crisis or even impending insolvency is a real challenge - for everyone involved, both internally and externally. Waiting until the insolvency administrator arrives is not always the best solution. As soon as medium-sized and large companies realize that their business is declining, seeking external help can be a good option in many cases. Many people shy away from the cost of external restructuring advice. However, on closer inspection, the comparatively high daily rate is quickly put into perspective. Restructuring consultants score points with their high level of professional qualification, extensive experience and far-reaching prudence. They have already successfully led many companies out of crisis and know what to do in which situation. Because time is of the essence - a crisis is a race against time and money - external restructuring consultants usually work 60 to 70 hours a week. Companies therefore get a lot for their money: a lot of expertise, a lot of experience and a lot of commitment.

This interview first appeared in our Theme Special "Ways out of the crisis". It provides you with proven best practices and first-hand expert tips for reorganization, restructuring and turnaround. Download now for free!