Crisis types and their symptoms are the early warning systems in receivables management — those who recognize them must act immediately.
Some time ago, a visibly angry creditor contacted us. He described how he had felt — as he put it — coldly dispossessed. Without warning, he was forced to waive a six-figure claim as part of a so-called StaRUG procedure — i.e. a judicial restructuring without insolvency. The debtor in question had hardly attracted any negative attention beforehand, apart from minor differences in payment terms. Despite regular credit checks via a leading credit agency, the blow came as a complete surprise.
This example shows: Credit agencies can only work with what they know — and that means the past. Their assessments are like looking in the rear-view mirror — helpful for orientation, but unsuitable for avoiding impending collisions.
The caller contacted us after watching our video “Freight forwarder’s lien — preventing the crisis from becoming a disaster”, which we have linked below. He was particularly interested in our recommendation to be proactive and proactive at the first signs of impending payment defaults. He asked for advice on how to better manage similar risks in the future.
This is an important topic that will become increasingly important in the coming years. An astonishing number of companies have not yet recognized the seriousness of the impending situation and are still in “fair weather mode”. If you want to avoid finding yourself in the smoking ruins of an insolvent company, you as an entrepreneur should urgently and immediately prepare for the impending turbulence.
Since we now know that we can no longer prevent payment defaults using conventional methods, it is necessary to use new instruments to prevent payment defaults.
But how can impending payment defaults be recognized in practice?
The deterioration of a company’s solvency can be precisely defined using business management methods. We apply the IDW S 6 standards of the Institute of Public Auditors in Germany.
Let’s look at the internal causes of crises among debtors. Even if legislators and affected debtors repeatedly try to involve creditors in their problems, it is not the task of creditors to correct the failings of their debtors. Therefore, it is not expedient to deal with the causes of the crisis on the debtors’ side at this point. To put it bluntly: creditors should not put on this shoe, as they are not responsible for the plight of their debtors. For the creditor, the causes of the crisis are less relevant with regard to his credit decision; what is more important are the indicators that can be derived from them. According to current business management theory in relation to receivables management, a distinction is made between eleven causes of crises and their symptoms.
Firstly, crises that are rooted in company management.
Typical symptoms of a crisis are:
Disputes at shareholder level
Differences of opinion within the company that lead to open and hidden conflicts
Unclear company and personnel management.
Secondly, crises that are rooted in the organization.
The crisis symptoms here are:
Communication and transparency deficits
Increasing workload in administration and management
Time delays due to increasing organizational and administrative effort
Thirdly: Crises in planning and controlling.
The symptoms of a crisis are:
Delayed provision of data for cost accounting and target/actual comparisons
Lack of comprehensible cost calculations for product or service variants
Supply problems due to inadequate inventory management.
Fourth: Crises in sales.
The symptoms include:
Decline in incoming orders and loss of market share
Customers secure new business relationships
Customers demand greater price concessions because they have the impression that the supplier is weak and compliant
Increase in recalls and complaints
Lack of incoming orders, later the transfer of already placed orders to other suppliers
Decline in requests for quotations.
Fifthly: crises in purchasing.
The symptoms of the crisis are:
Suppliers are reluctant to deliver or only deliver against advance payment
Reminders are becoming more frequent, dunning is generally faster
Payment terms are being reduced, suppliers’ credit lines are being cut
Trade credit insurers cancel or reduce their credit limits.
Sixth: Crises in the production sector.
The symptoms of a crisis are:
Underutilization of machinery and equipment
Rising inventories
Delivery problems
Non-compliance with quality standards and delivery deadlines.
Seventh: HR crises.
The crisis symptoms include:
Good, qualified employees leave; the fluctuation rate increases
Increase in absenteeism (e.g. due to sick leave)
High time and mental burden on management
Staff surpluses, but usually only in the productive area
Good applicants leave or can only be recruited with excessive salary promises.
Eighth: Crises in the investment area.
Symptoms of a crisis are:
Implementation of uneconomical investments
Investments are not financed with matching maturities
Investment backlog, which leads to an increasing susceptibility to disruptions in the process chain.
Ninth: Crises in research and development
The symptoms of a crisis are:
Lack of or insufficient innovative strength
Products and services that do not meet customer needs
Declining competitiveness due to outdated products.
Tenth: Crises in financing
The symptoms of a crisis are:
Banks demand real or personal collateral
Change of bank advisor (support is provided by the Special Credit Management or Intensive Care department)
Credit lines are frozen, reduced or called in.
Eleventh: Crises in payment behavior
The symptoms of a crisis are:
Sluggish payment behavior; payment targets are regularly exceeded
Delays in payment due to disputes about the legitimacy of receivables based on alleged complaints or supposed formal errors in invoicing.
If creditors notice several of these symptoms of crisis in their debtors, it is time to demand additional collateral.
You can find out more about this in our video “Building a firewall to secure receivables”, which is linked below. Or it makes sense to end a business relationship. The tried-and-tested commercial insight that the best deals are sometimes the ones you don’t make applies.
Please contact us if you have a specific case for a public auction: To the contact form
We have provided an explanatory video to provide information about the assignment: To the explanatory video for clients
Information on the auction process: To the explanatory video for bidders
More videos on the topic:
Build a firewall to secure receivables!
Options for hedging receivables — planning security in advance
Literature: Crone, Andreas / Henning, Werner (ed.), Modernes Sanierungsmanagement, Munich: 2021
