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Everything about insolvencies and their early detection

The economic aftermath of Corona can still be felt and inflation and current world politics are already causing the next uncertainties and bottlenecks for companies of all industries and sizes. Up to 25,000 insolvencies – especially among small companies – are expected in 2022 due to the economic effects of the pandemic alone. Bankruptcy seems to hang over many entrepreneurs like the sword of Damocles, but what actually is bankruptcy? When is she threatening? And what are the consequences for a company?

What is insolvency?

Basically, a company must have enough liquid funds to be able to meet its payment obligations - these include salaries, rent, liabilities and invoices, among others. If a company cannot guarantee solvency, or if there is another reason for insolvency, there is a risk of insolvency. From this point in time, the entrepreneur or the managing director is obliged to open insolvency proceedings.

The 3 reasons for insolvency

The so-called reasons for insolvency oblige managing directors to file for insolvency. In the insolvency code, a distinction is made between general and specific reasons for insolvency. The general reason for insolvency describes the state of insolvency (§ 17 InsO). The term "general" means that insolvency is the reason for the opening, regardless of the type of procedure and the debtor. Over-indebtedness (§19 InsO) is relevant as a special opening reason for legal entities and equivalent legal entities. In addition to these two reasons, there is the impending insolvency (§ 18 InsO) as a "voluntary" reason for insolvency, which enables the debtor to voluntarily file an application.

Insolvency (§ 17 InsO)

Insolvency exists when the company can no longer meet the payment obligations that are due and is likely to be permanently unable to do so. Insolvency is determined by comparing liquid assets and liabilities due (liquid assets/liabilities due). If the result of this calculation is less than 0.9, i.e. less than 90%, one speaks of insolvency.

It is then determined whether the company can eliminate the insolvency in the next three weeks. The calculation for this step is based on forecasts and is: Cash + Future Cash Inflows (three weeks)/Amounts Paid + Amounts Paid (3 weeks). If the quotient is less than 0.9, i.e. less than 90%, there is insolvency according to the BGH judgment and an application for insolvency must be filed.

Over-indebtedness (§ 19 InsO)

Overindebtedness under insolvency law exists if there is a negative forecast of continued existence and calculated overindebtedness is determined by an overindebtedness balance sheet. For the balance sheet, the over-indebtedness status and the prognosis on the continued existence of this status must be drawn up.

Impending insolvency (§ 18 InsO)

Impending insolvency occurs when the debtor is unlikely to be able to meet his payment obligations. It only gives the debtor the right to file an application for the opening of insolvency proceedings at an early stage.

Duties for the manager

As part of their business activities, the managing directors must fulfill increased planning, monitoring and control obligations. This also includes ensuring solvency through sufficient liquidity. In the event of insolvency and over-indebtedness, entrepreneurs of a corporation (e.g. GmbH or AG) are obliged to file for insolvency; in the event of imminent insolvency, there is the right to file for insolvency. According to § 15a InsO, if there is a reason for insolvency, insolvency proceedings must be applied for within three weeks. If entrepreneurs do not comply with this obligation, they are liable to prosecution for delaying insolvency.


Triggers for corporate insolvencies

Insolvency can be triggered by many different factors. In most cases, however, the insolvency cannot be attributed to a trigger, but to a combination of the following factors:

  • Lack of or poor leadership in management, controlling or accounting

  • Reduced sales due to external factors (such as restrictions caused by the corona pandemic) or internal developments (such as a lack of competitiveness)

  • Deteriorated liquidity due to e.g. B. Suboptimal invoice and receivables management

  • Increased costs with the same income, for example due to increased personnel or rental costs

Early detection through liquidity management

The triggers show that bankruptcy can threaten anyone whose control instruments are not working properly. However, declining sales combined with rising costs should be a serious signal for every entrepreneur that something is wrong. If the company still has sufficient liquid funds, this undesirable development must, but not necessarily, lead to insolvency. In order to be able to assess the risk of imminent insolvency, it is therefore important to always keep an eye on your own liquidity and to be able to assess it correctly. A functioning and accurate liquidity planning and its management is indispensable for this: costs must be precisely controlled and, if possible, reduced, due receivables must be collected and sales increased.

Tidely enables precise and holistic liquidity planning and thus supports the managing director as a central tool for crisis monitoring and control. With smart tools, Tidely shows liquidity bottlenecks at a glance, but also possibilities for securing and increasing liquidity. The possibility of a comprehensive liquidity report in real time shows the insolvency risk for the company in an understandable traffic light model. Based on planned values, the radar compares the solvency of today with that in three weeks and thus gives the entrepreneur the necessary foresight for future liquidity developments. For the most accurate assessment possible, conscientious monthly planning is required. The insolvency radar acts as a feature for the early detection of imminent insolvency and supports the Unin in its business obligations.

Always keep track of your finances with Tidely and, thanks to intelligent planning mechanisms, recognize the risk of impending insolvency at an early stage.

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