The current forecast data from the Purchasing Managers’ Index indicates that the economy is in danger of collapsing — with serious consequences for the financial situation of companies.
Taking the right measures to secure receivables immediately is the order of the day.
The recession in Germany continues unabated. For companies, the legally compliant implementation of effective mechanisms for securing receivables in their business processes is of existential importance.
Since its foundation, the Federal Republic of Germany has been a globally admired economic success story. The foundation of this rise was the social market economy introduced by Ludwig Erhard, which was based on free competition and at the same time guaranteed the protection of property rights.
However, such a situation is not guaranteed in the long term. Companies are increasingly relocating their production abroad — or ceasing operations altogether.
The newspaper “Die Welt” currently writes that all hopes of an end to the downturn have evaporated. Germany is in danger of falling back into recession in the coming months. The experts at the International Monetary Fund have issued a gloomy forecast for Germany and attest to continued weakness. China is quietly letting the German mechanical engineering industry die, writes the German business magazine “Wirtschaftswoche”. Current reports from the business world are an indication of this. At the agricultural group Baywa, debts in the billions are piling up. Kolbus, the world market leader in bookbinding machines, is insolvent. 550 employees are worried about their jobs. Inapa Deutschland GmbH has to file for insolvency. The same goes for the travel companies ITravel and FTI. And so on and so forth. This is just the beginning of a threatening wave of bankruptcies in Germany. Thousands of creditors are being dispossessed of their claims.
We don’t comment on politics, but deal with the consequences.
Small and medium-sized companies in particular will have to brace themselves for a gigantic wave of bad debts in unprecedented numbers and amounts. Those who do not prepare for this in good time run the risk of being dragged into the maelstrom of doom.
“It is not the strongest or most intelligent species that survives, but the one that adapts best” said Charles Darwin. When circumstances change, we have to adapt.
Deutsche Pfandverwertung has been dealing with the short-term realization of receivables through the application of statutory or contractual pledges of rights for many years. With our proven expertise, we can provide companies with practical advice on how to prepare for due receivables and bad debts.
It is now important to use all legal options with foresight and implement receivables protection in accounts receivable management. Persisting with previous processes is a double-edged sword. It encourages companies to maintain the status quo.
Lamenting is not an option. If the customer does not pay as agreed, it is often due to the company’s own structures. In accordance with the IDW S 6 standards for auditors and current business management theory, the reasons for the problems can be identified. These findings are applied in most group-affiliated companies to reduce payment defaults. Their auditors and consultants have set up the accounts receivable processes in such a way that, in the event of receivables falling due, there is an immediate response right down to clerk level. All legal options are used in the right order in a cost-optimized manner. This reduces the pressure to act. Otherwise, a company would have “bad cards” in the event of impending non-payment.
The future of a company is shaped by its daily processes. In most medium-sized or smaller companies, the reaction to debt situations is unprepared. The extent of payment defaults, which can quickly accumulate, is not assessed in terms of their consequences; instead, well-worn paths are followed, which usually take forever to reach a result, if at all.
We do not regard everyday decisions as serious decisions. However, because everyday decisions accumulate with all the missteps — over the course of weeks, months or even years — they add up. Ultimately, this has a major impact on the company’s liquidity and earnings. For effective receivables management, the implementation of many small measures is far more important than the supposedly big decisions. Even if these seemingly small changes do not appear to be particularly important at the moment, optimized processes have an enormous overall impact on a company’s resilience in the event of overdue payments and the ability to realize receivables at short notice.
The following measures can be used to immediately build an effective firewall to reduce overdue payments and bad debts.
First:
It should be checked whether the company can apply the privilege of statutory pledges of rights.
Secondly:
Goodwill in the event of payment arrears is rarely rewarded. Experience has shown this. In order to rule out legal disadvantages from the outset, the statutory pledge of rights should always be asserted immediately to protect your own company when payments are due. Entrepreneurs are often unaware of their statutory pledge of rights. Before an entrepreneur files a cost-intensive lawsuit, he should definitely exercise his pledge of rights. The necessity of this procedure can be explained to the debtor in friendly terms.
Thirdly:
In all B‑to‑B contractual relationships, the general terms and conditions should include a clause on the pledge of rights, stating that debtors undertake to proactively support the realization of a pledge.
Fourthly:
The consequences of the criminal offense of pledging should be pointed out in the contract. The majority of debtors do not know this.
Fifthly:
When lending larger sums, the option of a contractual lien agreement by pledging company shares — at least temporarily — should be used.
This puts the subordinated secured creditor in a much stronger position when payment is due.
By using the pledge of rights, an entrepreneur puts himself in a more advantageous starting position. Creditors have to accept fewer compromises and disadvantages in negotiations with debtors or insolvency administrators. In the event of impending default, a professionally prepared negotiating position is crucial, and this could be decisive for the survival of your own company.
If you are well positioned, you don’t have to be smarter than others to achieve a better performance. Even the smartest person looks stupid if they are poorly positioned. From an optimized position, you are superior. A company with low debt and liquid assets only has good options and can take advantage of great opportunities in the years ahead. But for highly indebted entrepreneurs, the scope for action is becoming ever narrower. Your current position is one thing. The important thing is whether you are prepared to improve this position immediately!
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Featured photo: Lazy_Bear, envato elements license 9AHNZ526PT
