The current crisis not only has a major impact on the liquidity of companies: It also affects their payment morale. The focus is on existing contracts - as well as on future business relationships. What options do entrepreneurs have in the event of their business partners going bankrupt? Which contractual clauses are important for existing and future business relationships?
We asked Reiner Winkelbauer, business mathematician, experienced managing director and CFO in the aerospace and pharmaceutical industries. He has been advising companies as a partner at enomyc for about five years. What recommendations does he have for entrepreneurs? How can they protect their company in the current situation?
Mr. Winkelbauer, you have left the operative track and switched to the consultancy side. What are your goals?
I have been able to gather a lot of experience as managing director and CFO over the past 25 years. My intention is to share it - with companies and entrepreneurs. I enjoy solving problems and helping my clients to succeed. That's why I also act as a consultant with heart and mind.
Can you give fundamental advice right at the beginning of the interview to help companies protect themselves against liquidity bottlenecks?
Yes, "Cash is King": Entrepreneurs must first and foremost recognize that liquidity is a much higher priority in times of crisis than perhaps the profitability of the company. They must also be able to meet their obligations in times of crisis - as contractually agreed: Employees expect their salaries to be paid, business partners and suppliers expect invoices to be settled, banks expect interest and principal payments. And often the possibilities for financial cushions lie within the own company - keyword "working capital" - but are not optimally used.
"Working Capital" - can you explain this in more detail?
Where do entrepreneurs tie up extremely large amounts of capital? In working capital. In inventories. Inventories are there to manufacture your own products - and then sell them. There is an important difference here between inventories that are held by the company itself and cover the annual production requirements and those that the company only pre-finances for a few months. This is precisely where optimization opportunities often exist. The same applies to receivables management itself: Here companies should agree acceptable payment conditions and payment terms with their customers. And do the same on the supplier side. The topic "Working Capital Management" brings these components together.
If companies consciously deal with it, they can secure liquidity and also gain additional liquidity. Companies that have already done this in advance draw on a financial cushion that can save them even in times of crisis. Nevertheless, even such companies can suffer damage from the bankruptcy of their business partners.
Can companies even arm themselves against the changed payment practices or even bankruptcy of their business partners?
Yes, there are possibilities. I am thinking roughly of three categories: first, transparency and information; second, contract; and third, risk shifting. But first of all, every company must realize that there will also be a phase after the crisis. This means that even if some of the proposals we are discussing now can no longer be implemented at the present time - and certainly not in the short term - we should still learn from a crisis. I hope that there will be enough companies that emerge from the crisis stronger than before.
Okay, let's start with point one: You mention "transparency and information" as a protective factor. Where can entrepreneurs get the information they need?
There are many sources that can paint a picture of a business partner. One source is providers who are specialized in providing exactly these relevant figures, data and facts about a potential business partner. This also includes creditworthiness information and information on ratings. At the same time, interested companies can use the electronic Federal Gazette to pull data and analyze the balance sheets or income statements of the potential business partner.
Can fluctuation also be an indicator?
Absolutely. The press provides a lot of information on this. Does a potential business partner have a high fluctuation in the workforce? What about fluctuation in management? Are there frequent changes on the shareholder side? Here, common sense provides important answers. In any case, it is worth taking a close look at it, getting to know the business partner, knowing how the market in which he operates works. The same applies on the supplier side: companies should know their supplier better than he knows himself. Information on previous payment behavior, whether there have been changes there or whether there are currently some in the pipeline - these are very important indicators. Here I advise to talk about things directly, in order to avoid unpleasant surprises.
Here again, the clauses from the contract should come into force and with it the second possibility, in order to protect the business. What should be taken into account when drawing up the contract?
Contracts should be drafted in such a way that agreements are clearly formulated. A contract should offer maximum protection for oneself. For example, it should define due dates. This saves you having to think about when a business partner is in default of payment. Solution clauses should also be part of the contract. Companies should be given the option of terminating a business relationship early, for example in the event of impending insolvency - not just when it occurs. It should be stipulated in the contract that a business separation is already possible in the event of default of payment, deterioration of assets or breach of material contractual obligations. Entrepreneurs can also take out insurance on issues such as retention of title or liens. There are a variety of possibilities and experts can provide support in this respect.
Let's come to the third component: To what extent can a risk shift protect companies from the bankruptcy of their business partners?
First of all: Risk shifting is associated with costs. One can certainly think about selling the receivables that exist against a business partner. That is the principle of "factoring". Conversely, on the supplier side, if payments to the supplier have been triggered and the company is still waiting for delivery, companies can insure themselves through trade credit insurers. In this case, too, there are various options that companies should explore for themselves with external partners.
What would you advise companies that are already extremely shaken by the Corona crisis to do?
I would strongly advise them to reconsider any cash expenditure at this point in time. Is that absolutely necessary now? Or can it possibly be postponed? Take advantage of the assistance offered by the government, such as the deferral of sales tax and social security contributions. Last but not least, I would like to mention An impending insolvency is not a trivial offence. Professional advice is indispensable here. I recommend contacting a specialist lawyer for insolvency law. In any case, remember that there will also be a phase after the crisis and prepare yourself for it!
Which key question do you think helps companies to self-check their own situation?
Companies must deal intensively with the issue of liquidity. I would like to mention one aspect here that I mentioned at the beginning: transparency and information. For me, it is essential that an entrepreneur must be able to provide information about his or her own liquidity at all times - both currently and in the long term. Entrepreneurs should therefore ask themselves: "Am I able to meet my payment obligations or not? This is a management task. Managers need to take care of their receivables and consider whether they can accelerate their customers' payments if they get involved. Or whether the situation is already so far advanced that they may need to set up payment plans with their suppliers to stretch their own liquidity.
What role do the banks and financiers with whom companies work play at this point?
These are extremely important partners who - just like the companies themselves - want to be immune to surprises. I urgently recommend working and communicating with the banks in a constructive and trustworthy manner at an early stage, so that they can expect support when things get difficult. Whether it is by granting short-term loans, by extending a current account line or other measures.
How do you assess further developments and what tips do you have for the future?
You would have to be a prophet to be able to estimate what is still to come. The Corona crisis is not over. We will therefore have to deal with the fact that we will be in the current situation a little longer. Therefore, I would like to conclude by giving entrepreneurs the following advice:
- Please secure your liquidity in the short term.
- Maintain trustful communication with your banks and financial partners.
- See the current crisis as an opportunity to reposition your company. Then you can emerge stronger from this phase.
Thank you very much for the interview, Mr. Winkelbauer.