Mastering liquidity crises

Measures against financial crises

The business of manufactories, designers and artisans is rarely a self-runner. Few entrepreneurial developments run straight upward. High personnel costs, difficult distribution channels, start-up costs: It is not unusual for manufactories to face the situation of having to bridge liquidity bottlenecks.

Causes of liquidity bottlenecks

The causes of liquidity bottlenecks in small and medium-sized manufactories are extremely diverse: a slump in sales, poor payment behaviour of important customers, sustained operating losses or a rapid company growth too rapid and so-called growth thresholds can burden company liquidity.

In such a situation it is important to act quickly and deliberately. To this end, all possibilities for covering the bottleneck should first be played through, so that you can then decide on the most suitable one. A liquidity plan should also be drawn up. On this basis, necessary measures can then be taken together with the suppliers, banks and other creditors concerned.

For many companies, there is also the possibility of significantly improving the liquidity situation by releasing liquidity previously tied up in the company, even without raising fresh funds from outside. In the following, the German Craft Council wants to point out some important measures that can easily be used to release additional liquidity. To this end, we distinguish between short-term, medium-term and long-term measures.

In the short term: delaying expenditure and accelerating revenues

In the short term, expenditure needs to be delayed and revenue accelerated, in particular through the following measures:

  • Short-term reduction of private withdrawals to the absolute necessary level
  • Prompt and consistent invoicing of partially completed services
  • Create final invoices immediately after service provision
  • Regular review of payment terms granted
  • Continuous monitoring of customer payment behaviour
  • Replacement of security retentions by warranty guarantees
  • Keeping an eye on the limitation periods of claims
  • Agreement of down payments, partial payments or cash payments with customers
  • Quickly remedy defects from the customer’s point of view so that payment cannot be delayed
  • Payment incentive through the offer of discounts
  • Consistent dunning process for defaulting customers
  • Threat of interest on arrears and commissioning of debt collection agencies
  • Negotiating long-term payment terms with suppliers/subcontractors
  • Negotiate short-term suspension of redemption with the bank
  • Debt rescheduling to longer-term loans to reduce redemption payments

Medium and long-term: realign companies and increase earnings

As soon as the short-term liquidity crisis has been overcome, you should intensively deal with the causes of the crisis. The cause often lies in an existing success or earnings crisis as the result of a strategy crisis. If you do not succeed in overcoming this crisis, you will quickly slide into the next liquidity bottleneck. You can only achieve lasting success if you get the strategy crisis under control.

Suitable measures that have a positive effect in the medium and long term are particularly important:

  • Review of your product range: eliminate loss-makers and focus on products with high returns and interesting market niches.
  • Increase prices by adding value/exclusivity to your products
  • Development of new, future-oriented markets
  • Create the basis for fast invoicing (prepare quotation data in such a way that it can flow immediately into invoicing)
  • Consistent cost management and increased productivity
  • Better utilization through active sales of your products
  • Sale of fixed assets not (any longer) absolutely necessary (machines, vehicles, securities, real estate etc.)
  • Reduction of current assets to the extent necessary for business purposes
  • Sale-and-lease-back of used equipment and machinery
  • Leasing of assets not used to capacity
  • Letting to third parties of underutilised real estate portfolio
  • Additional collateral to increase the credit line
  • Careful investment planning as cornerstone for solid financing
  • Check to what extent existing loan and partnership agreements contain sufficient protection against premature disbursement or termination.

The measures described represent only a part of the conceivable range of instruments and should always be adapted to the individual situation of the company.

Save the Date
Workshop Financing
11.9.2019
Direktorenhaus, Berlin
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Contact Person at Meisterrat:
Dr. Boris Karcher
karcher@meisterrat.de