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.

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Direktorenhaus, Berlin
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Contact Person at Meisterrat:
Dr. Boris Karcher