Module 4_Liquidity Crisis & Liquidity Management.pptx

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Liquidity Crisis &
Liquidity
Management
Module 4:

The information and measures presented here are general advice and do not constitute business, insolvency or tax
advice. Neither the project partners nor the European Commission as funding body accept any liability for whether
you take or do not take any action based on this information. Furthermore, no liability towards third parties is
accepted. This also applies in the event that information presented here is incorrect in whole or in part despite careful
compilation.
Important notice:

Liquidity Crisis
in Tourism SMEs

1
If you leave liquidity to chance,
things can get serious very
quickly.
After completing this module,
you will have insight knowledge
to…
Practical Example of Monthly
Liquidity Planning
2
Characteristics of a Liquidity Crisis
3
Liquidity Planning
4 Financial Measures to Overcome the
Liquidity Crisis
Key Financial and Liquidity Ratios
5
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… know the essential
characteristics of a liquidity crisis
… know how to reduce the
probability of your SME facing
insolvency
… be familiar with the basic
structure of liquidity planning
… be familiar with a practical
example of liquidity planning
…know the key financial and
liquidity ratios
After completing this
module, you will…
Photo: Adobe Stock

As a rule, the more advanced
the crisis, the more difficult and
expensive it is to resolve. The
liquidity crisis manifests itself in
the fact that the company's
financial reserves decrease
significantly and credit lines are
exhausted. In some cases,
suppliers demand payment in
advance because your credit
rating is considered poor.
Corporate crises usually follow a typical course. The individual phases can vary in length - sometimes a phase is
skipped
What is a liquidity crisis?
Stakeholder
Crisis
Strategy
Crisis
Product- /
Sales Crisis
Earnings
Crisis
Liquidity
Crisis
Insolvency
• Credit lines exhausted
• Increase in liabilities
• Late payments
• Suppliers demand advance
payment
• Supply bottlenecks
Sales /
Profit /
Liquidity

Analysis of insolvencies of
tourism enterprises show
specific variables influencing
the probability of insolvency:
Tänzel, M. (2019). Bankruptcy Prediction in
Alpine Tourism: A West Austrian consideration
There are specific characteristics and influences that affect the probability of insolvency of tourism
businesses
Overview of selected influences on the probability of insolvency of tourism enterprises (I/II)
Debt capital
06
The higher the company's debt
capital, the higher the probability of
insolvency
Equity ratio
05
The higher the equity ratio, the
lower the probability of insolvency
Age
02
The older the company, the lower
the probability of a crisis /
insolvency
Size
01
The larger the company, the lower
the probability of insolvency
Retained earnings
04
The more retained earnings a
company has, the less likely it is to
become insolvent
Working capital
03
The higher the working capital in
relation to the balance sheet total, the
higher is the probability of insolvency

Analysis of insolvencies of
tourism enterprises show
specific variables influencing
the probability of insolvency:
Tänzel, M. (2019). Bankruptcy Prediction in
Alpine Tourism: A West Austrian consideration
There are specific characteristics and influences that affect the probability of insolvency of tourism
businesses
Overview of selected influences on the probability of insolvency of tourism enterprises (II/II)
Rural areas
11
Companies in rural areas are less
likely to experience crises and
insolvency
Apprenticeships
08
The more the number of apprentices
in the sector decreases, the lower the
probability of insolvency
Price Index
07
The higher the consumer price
index, the lower the probability of
insolvency
Cities
10
Companies in centres, cities and
suburbs are more likely to experience
a crisis
Insolvency rates
09
The higher the annual insolvency rate
in the sector, the lower the
probability of insolvency for a single
company

Based on the factors influencing
the probability of insolvency,
fundamental implications and
recommendations can be
derived:
Plaikner, A.; Tänzel, M.; Sparber, J.:
Tourismusforschung Tirol (2020)
From the scientific analysis of the influences of insolvency in tourism companies, fundamental implications and
recommendations can be derived in order to reduce the probability of insolvency
General implications and recommendations for tourism SMEs (I/II)
4
The "family" should be used to
strengthen the brand of the company
and thereby create a differentiating
factor
3
Older companies can rely on
tradition and should focus on the
"family" in this context
2
Owners should expand their
networks beyond the region in order
to be able to use these resources
strategically
1
Smaller companies should try to
expand their capacities and
resources in order to be prepared
for future crises

Based on the factors influencing
the probability of insolvency,
fundamental implications and
recommendations can be
derived:
Plaikner, A.; Tänzel, M.; Sparber, J.:
Tourismusforschung Tirol (2020)
From the scientific analysis of the influences of insolvency in tourism companies, fundamental implications
and recommendations can be derived in order to reduce the probability of insolvency
General implications and recommendations for tourism SMEs (II/II)
8
It should be checked whether the
financing and capital structure fit the
company and, if necessary, need to
be adjusted
7
Measures must be initiated to
introduce efficient processes and
reduce various costs
6
Industry-wide concepts should be
developed to increase the
attractiveness of working in tourism
in general
5
A strong employer brand is
important to attract good
employees
9
Companies need professional
working capital management in
order to control and maintain
liquidity
Liquidity is the focus of this module

Typically, the tourism sector is
characterized by seasonality,
dependencies that are difficult
to plan, and in many sub-
sectors also by volatile prices -
to name just a few exemplary
characteristics.
The tourism sector is characterized by factors that make sound liquidity planning even more important - but at the
same time can make it significantly more difficult
Complexity of liquidity planning in tourism
Prices
02
In many areas (for example, hotels), the
tourism sector is characterized by
highly fluctuating prices. This is closely
linked to seasonality.
Environment
03
The tourism sector is often influenced
by external factors that are difficult to
plan (e.g. weather, pandemic, etc.)
Seasonality
01
characterized by highly fluctuating
demand throughout the year.

If your company is subject to
highly fluctuating demand, then
you need to build up enough
liquidity in the months with
strong sales to compensate for
the months with weak sales.
The tourism sector is normally characterized by strongly fluctuating demand. In this context, one speaks of
seasonality
Complexity of liquidity planning in tourism: Seasonality
Sufficient liquidity
reserves must be built up
for the weaker phases in
order to be able to
compensate for the
fluctuations in sales and
cash inflows.
Analysis of fluctuations
in recent years is
necessary.
If no historical data is
available, assumptions
must be made.
Prices
02
Environment
03
Seasonality
01

Price fluctuations have a
significant impact on liquidity
planning - and must be taken
into account accordingly.
Price fluctuations, for example in the hotel industry, must be taken into account in liquidity planning in order to
provide as accurate a picture as possible of future liquidity developments
Complexity of liquidity planning in tourism: Prices
If the business model
shows fluctuating prices,
these must be taken into
account in liquidity
planning.
Prices
02
Environment
03
Seasonality
01

Unforeseen events and
environmental factors cannot
be planned for - accordingly, it
is important to build up
sufficient liquidity reserves.
External environmental factors can have a significant impact on sales in the tourism sector. These cannot be
planned - accordingly, you should build up liquidity reserves in order to be secured
Complexity of liquidity planning in tourism: Environment
Due to the dependency
of factors that cannot be
influenced, a sufficient
liquidity reserve must be
taken into account. The
amount of the liquidity
reserve can best be
derived from an analysis
of several years in the
past.
Prices
02
Environment
03
Seasonality
01

Liquidity planning considers all
cash inflows and outflows in the
period under review.
Liquidity planning is intended to ensure that the company is able to meet its payment obligations at all times and
to identify short-term financing requirements
Basic structure of liquidity planning
Total of all incoming payments Total of all payouts
+ Sales / services
+ Debtor payments
+ Other cash inflows (e.g. interest,
owners' capital contributions, etc.)
- Payments for goods and materials
- Wages, salaries, social benefits
- Advertising
- Taxes such as value added tax
- Interest on capital
- Insurance
- General office and administrative
expenses
- Rent
- Other disbursements (electricity,
water, etc.)

Liquidity Status
+ Cash flow from operating activities
+ Cash flow from investing activities
+ Cash flow from financing activities
= Change in cash and cash equivalents
with effect on liquidity
Cash inflows and outflows from
operating activities as well as
from investing and financing
activities must be taken into
account.
Liquidity planning comprises the sub-plans "operating activities", "investing activities" and "financing activities".
Cash inflows and outflows from operating activities
Net of investments / divestments
Net balance from external financing activities
Financial resources = sum of all above items
Available Liquidity

Due to the linking of profit and
loss planning, liquidity planning
and balance sheet planning, this
is also referred to as "integrated
planning".
There is a close connection between liquidity planning, profit and loss planning, and balance sheet planning
Integrated corporate planning
Profit and loss planning Balance sheet planning
Preparation / coordination of
the subplans
Liquidity planning
Total output
- Cost of materials
= Gross profit
- Personnel expenses
- Other operating expenses
= EBITDA**
- Depreciation and
amortization
= EBIT*
- Financial result
= Operating result
- Non-operating result
- Taxes
= Net income/loss for the year
Sales planning
Procurement
Personnel
Other expenses
Investments
Assets
• Fixed assets
• Current assets (inventories,
cash and cash equivalents)
Equity and liabilities
• Equity
• Accruals
• Liabilities
• Cash flow statement
• Cash and cash equivalents
• Interest income / expense
*EBIT: Earnings before interest and taxes
**EBITDA: Earnings before interest, taxes,
depreciation and amortization

Liquidity planning takes into
account all incoming and
outgoing payments already
booked as well as the planned
values. Together with the
account balance and the credit
line, this results in the available
liquidity.
Both actual and planned values are taken into account in liquidity planning
Structure of liquidity planning
PLAN values
• Sales
• Cost of materials
• Third-party services
• Other costs
• Interest and amortization
• Investments / divestments
ACTUAL values
• Account balance
• Booked accounts
receivable
• Booked accounts payable
• Credit limit
Account balance
+ Accounts receivable
(booked)
+ Turnover
+ Disinvestments
= total receipts
- accounts payable
- material costs
- external services
- other costs
- interest and redemption
= total disbursements
+ available credit line
= available liquidity
Period
t0 t1 t2
Liquidity
Tn

Practical Example
of Monthly
Liquidity Planning

Status
Quo
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12
Cash and cash equivalents at beginning of
period
Cash inflow from operating activities (incl.
accounts receivable)
Thereof booked
Thereof from planning
Cash inflows from disinvestments
Cash inflows from financial income
Total payments received
Cash outflows from operating activities (incl.
accounts payable)
Thereof booked
Outflows for investments
Outflows for financial transactions
(redemption / interest)
Total outgoing payments
Surplus / shortfall
Measures
Cash and cash equivalents at the end of the
period
This simplified example shows a small, family-run hotel. A liquidity planning for the coming year is to be carried out
Simplified example of monthly liquidity planning for a full financial year (in thousands of EUR)

Status
Quo
period
100
Thereof booked 50 40 30
accounts payable)
Thereof booked 10
2 2 2 2 2 2 2 2 2 2 2 2
Surplus / shortfall
Measures
period
First the already known information is entered
Initial situation:
• There is currently € 100,000 in the account. There are no
other liquid funds.
• There are already some bookings for the next three
months.
• In addition, there are already posted incoming invoices
that will be due in the next month.
• The company has a current loan, for which € 2,000
interest and repayment are due every month.

Status
Quo
period
100
Thereof from planning 50 50 30 20 20 10 60 30 70 70 80 100
accounts payable)
Thereof booked 10
2 2 2 2 2 2 2 2 2 2 2 2
Surplus / shortfall
Measures
period
Based on this, the planned values from corporate planning are entered. For this purpose, data from previous years
are also analyzed and included in the planning
Revenue planning:
• The basis for the planning of sales is the previous year, there are no indications
that the following year should be different from the previous year
• It is known from the past that months 4, 5, 6 and 8 are weak months
• Month 7 is typically a stronger month due to a trade show during this period

Status
Quo
period
100
accounts payable)
Thereof booked 10
Thereof from planning 55 60 (45 + 15) 45 25 25 20 45 30 50 50 55 65
2 2 2 2 2 2 2 2 2 2 2 2
Surplus / shortfall
Measures
period
In this example, the costs are made up of a fixed cost block and a percentage of sales
Cost planning:
• The fixed costs amount to € 15,000 per month
• The variable costs are calculated on the basis of the analysis of the previous year's
values and amount to 50% of the operating turnover

Status
Quo
period
100
Cash inflows from disinvestments 10
accounts payable)
Thereof booked 10
Outflows for investments 100
2 2 2 2 2 2 2 2 2 2 2 2
Surplus / shortfall
Measures
period
In the months with a low turnover, some rooms are to be renovated.
Investment planning:
• In the low turnover month 6 some rooms are to be renovated
• € 100,000 are planned for the renovation
• Old furniture is to be sold. € 10.000 sales proceeds are planned

Status
Quo
period
100 100
accounts payable)
Thereof booked 10
2 2 2 2 2 2 2 2 2 2 2 2
Surplus / shortfall
Measures
period
100
The final values of the previous period form the starting point for the following period
Liquidity planning :
• The closing balance of the liquidity of the previous period is entered as the opening balance of the
following period

Status
Quo
period
100 100
Cash inflows from divestments 10
Total payments received 100
accounts payable)
Thereof booked 10
2 2 2 2 2 2 2 2 2 2 2 2
Total outgoing payments 67
Surplus / shortfall
Measures
period
100
The planned cash inflows and outflows are totaled
• The planned cash inflows and outflows are totalled

Status
Quo
period
100 100
accounts payable)
Thereof booked 10
2 2 2 2 2 2 2 2 2 2 2 2
Surplus / shortfall 133
Measures 0
period
100 133
The closing balance of the respective period is calculated from the summed values
• Cash and cash equivalents at the end of the period are calculated as follows
Beginning balance
+ Total cash inflows
- Total cash outflows
+/- Liquidity control measures
+
-
=
+/-
=

Status
Quo
period
100 100 133
accounts payable)
Thereof booked 10
2 2 2 2 2 2 2 2 2 2 2 2
Surplus / shortfall 133
Measures 0
period
100 133
The closing balance of the period in turn forms the starting point for the following period - and so on
• The cash and cash equivalents at the end of the period are entered as the starting balance in the
following period

Status
Quo
period
100 100 133 161 174 167 160 58 71 101 119 137 160
Total payments received 100 90 60 20 20 20 60 30 70 70 80 100
accounts payable)
Thereof booked 10
2 2 2 2 2 2 2 2 2 2 2 2
Total outgoing payments 67 62 47 27 27 122 47 32 52 52 57 67
Surplus / shortfall 133 161 174 167 160 58 71 101 119 137 160 193
Measures 0 0 0 0 0 0 0 0 0 0 0 0
period
100 133 161 174 167 160 58 71 101 119 137 160 193
All values are entered in the planning table

Status
Quo
Cash and cash equivalents at beginning of period 100 100 133 161 174 167 160 58 71 101 119 137 160
Measures 0 0 0 0 0 0 0 0 0 0 0 0
Finanzmittelbestand zum Ende der Periode 100 133 161 174 167 160 58 71 101 119 137 160 193
Liquidity is expected to be sufficient to implement the planned renovation measures
0
50
100
150
200
250
Status
Quo
Liquidity development
Cash in Cash out Liquidity End of Period

Status
Quo
period
100 100 107 110
Thereof from planning 10 10 20
Total payments received 60 50 50
accounts payable)
Thereof booked 10
Thereof from planning 41 45 45
2 2 2
Total outgoing payments 53 47 47
Surplus / shortfall 107 161 174
Measures 0 0 0
period
100 107 110 113
After three months, the planning is updated. The actual values are significantly worse than planned.
Planned / actual comparison:
• It can be seen that the ACTUAL values of sales are significantly lower than
originally planned.
• Variable costs are also higher than last year. They now amount to 60% of actual
sales

Status
Quo
period
100 100 107 110 113 100 87 -16 -17 -26 -27 -28 -25
accounts payable)
Thereof booked 10
2 2 2 2 2 2 2 2 2 2 2 2
Surplus / shortfall 107 110 113 100 87 -16 -17 -26 -27 -28 -25 -14
Measures 0 0 0 0 0 0 0 0 0 0 0 0
period
100 107 110 113 100 87 -16 -17 -26 -27 -28 -25 -14
Due to the actual development, the planning is also adjusted
Adjustment of the planning
• Due to the lower values, the future planning will have to
be adjusted.
• For reasons of precaution, the sales forecast is reduced.
• The actual variable costs are taken over for the future
values.
The adjusted planning shows that the planned renovation
cannot be implemented because the liquidity would not be
sufficient.

Status
Quo
period
100 100 107 110 113 100 137 32 29 18 15 12 13
accounts payable)
Thereof booked 10
2 2 2 2 2 4 4 4 4 4 4 4
Measures 0 0 0 0 50 0 0 0 0 0 0 0
period
100 107 110 113 100 137 32 29 18 15 12 13 22
Due to the adjusted planning, the family decides to finance the planned renovation through an additional
loan
Adaptation of the planning
• Since the renovation is important for the future
development of the hotel, the family decides to take out a
loan to finance the renovation.
• In order to have a liquidity buffer, a loan of € 50,000 is
taken out. This increases the financing costs

Example 1: Payment of accounts payable in the amount of € 10,000 (creditors
according to the balance sheet as of 31.12.2021) at 100% in January 2022
Effect:
- Liquidity:
- Balance Sheet:
- Profit and Loss Statement:
Consider what influences this
exemplary business transaction
has on liquidity, the balance
sheet and the profit and loss
statement.
Due to the linking of the individual plans in the integrated financial planning, business transactions usually also
have an influence on the different sub-plans
Examples of selected business transactions on integrated financial planning

Example 1: Payment of accounts payable in the amount of € 10,000 (creditors
according to the balance sheet as of 31.12.2021) at 100% in January 2022
Effect:
- Liquidity: Cash outflows from operating activities in the liquidity planning in
January 2022 (gross)
- Balance Sheet: Reduction of accounts payable in January 2022 by the amount of
the outgoing payment
- Profit and Loss Statement: No effect

Example 2: Revenues of € 10,000 (net) in January 2022 and receipt of payment in
February 2022 (sale with payment term)
Effect in January:
- Profit and Loss Statement:
- Balance Sheet:
- Balance Sheet:
Effect in February:
- Liquidity:
- Liquidity:
- Balance Sheet:
Consider what influences this
exemplary business transaction
has on liquidity, the balance
sheet and the profit and loss
account.

Example 2: Revenues of € 10,000 (net) in January 2022 and receipt of payment in
February 2022 (sale with payment term)
Effect in January:
- Profit and Loss Statement: Revenue in January 2022 in the amount of € 10,000
- Balance Sheet: Accounts receivable from deliveries and services in January 2022 in
the amount of € 10,000 plus applicable VAT (gross)
- Balance Sheet: VAT liability in January 2022 in the amount of VAT typically payable in
the following month
Effect in February:
- Liquidity: Payment from operating business in liquidity planning in February 2022 in
the amount of € 10,000 plus VAT
- Liquidity: Payment of VAT / VAT balance
- Balance Sheet: Reduction of accounts receivable in the amount of the payment of
10,000 plus VAT (gross)

Please take a look at case study no.
6 to see how a family-run hotel in
Germany has implemented the
liquidity planning. This will help
you deepen your understanding
and to learn about the specific
challenges.
Case Study

Financial measures
to overcome the
liquidity crisis

Financial management
measures include all activities
that serve to manage insolvency
and over-indebtedness in acute
crisis situations and thus to
secure liquidity and recover the
balance sheet.
Liquidity bottlenecks and the threat of over-indebtedness are characteristics of a company in need of financial
restructuring
Financial measures: Introduction
Not in focus:
2
Primary focus
1
They do not primarily serve to
overcome the loss situation (but
can have an influence on it).
They form the basis for creating
room for manoeuvre for a
restructuring process.
Focus of financial measures:

Some measures can be carried
out by the company's
management itself, while
others require the approval or
involvement of external
stakeholders.
Financial measures can be classified according to whether they can be carried out by the management itself
(autonomous measures) or whether the involvement of external parties is required (heteronomous)
Financial measures: Autonomous and heteronomous measures
Heteronomous
measures
Financial measures in which external
stakeholders (e.g. banks, creditors,
government or customers) must be involved.
Autonomous
measures
Financial measures that management can
implement themselves.

Internal financing measures are
based on the economic strength
of the company - whereas
external financing involves the
injection of equity and / or debt
capital.
A basic distinction can be made between internal financing and external financing
Financial measures: Distinction between internal financing and external financing
Balance sheet
Fixed assets
Current assets
Equity
Debt capital
Internal financing =
from own resources
External financing =
injection of capital

While some measures are
aimed at improving the liquidity
situation, others serve to clean
up the balance sheet.
A further distinguishing characteristic of financial measures is their direction of impact on liquidity and/or the
balance sheet
Financial measures: Liquidity-oriented measures vs. balance sheet-adjusting measures
Liquidity-oriented
measures have a direct
liquidity effect
Balance sheet-oriented
measures serve to avoid
over-indebtedness and
can also have a liquidity
effect.

Financial measures can focus on
different objectives:
The focus of financial measures is firstly to avoid insolvency, and then to provide the funds for rehabilitation and
sustainable restructuring.
Financial measures: Objective of measures in the restructuring process
Ambulance
Short term
stabilisation
Intensive Care
Operation and
removal
of causes
Rehabilitation
Permanent
recovery
Short-term measures to
avoid the risk of
insolvency
Medium-term measures to
finance the restructuring
Long-term measures to
finance
sustainable competitiveness

While short-term measures to
secure solvency and liquidity
are usually less complex,
fundamental adjustments to
the financing and capital
structure can take a
considerable amount of time.
Financial measures are sometimes very complex and require a correspondingly long time for preparation and
implementation
Financial measures: Complexity and time requirements
Complexity
Time
required
Solvency
Securing liquidity
Capital structure
Financing structure
Focus of
this module
Solvency Securing liquidity Capital strucutre
Financing structur

The actual degree of complexity
and the corresponding time
required depends, of course,
very much on the situation of
the company in question.
Financial measures are sometimes very complex and require a correspondingly long time for preparation and
implementation
Financial measures: Complexity and time requirements
Complexity
Time required
Solvency Securing liquidity Capital structure
Financing structure
Deferral
Keeping Still
Waival of Receivables
Postponement of Priority
Letter of Comfort
Shareholder loan
Endowment of Capital Reserve
Extension of short-term credit line
Working Capital Management
Wage and Salary Concessions
Supplier Loans
Short-time
Bridge Loan
Grant Loans
Rehabilitation Loan
Factoring
Sale and Lease Back
Restructuring
Debt-Equity Swap
Debt-Mezzanine-Swap
Mezzanine Financing
Bonds
Addition to equity
Silent Partners
Repurchase of Receivables
Cash Management
Restructuring of collaterals
Waival of pension commitments

A deferral typically requires a
healthy relationship with the
creditors, who must agree to
the deferral.
A deferral of due liabilities can help to avert direct illiquidity and thus minimise the acute risk of insolvency.
However, the amount of the liabilities remains unchanged
Selected measures to avert insolvency: deferral of due liabilities
Solvency
Measure Deferral
Definition / description: A deferral postpones the due date of a payment to a later point in
time in the future. It is requested by the debtor and the creditor must
agree to the deferral. During the period of deferment, the creditor
does not enforce his claim. It is a bilateral contract, but can normally
be revoked and terminated by the creditor at any time.
Focus and effects: - Avoidance of insolvency
- Heteronomous measure
- Internal financing measure
- Direct liquidity effect (disbursements are postponed)
- Normally no effect on the balance sheet
Implementation: 1. Addressing the creditors by the debtor
2. It is essential to put this in writing and ideally have it signed in
order to document the deferral.

The letter of comfort must be
formulated in a legally sound
manner so that it is actually
able to avoid the obligation to
file for insolvency.
Letters of comfort are typically used between parent and subsidiary companies - but can also be issued by the
shareholders or externally
Selected measures to avert insolvency: Letter of comfort (I/II)
Solvency
Measure Letter of Comfort
Definition / description: A letter of comfort exists when one (legal) person, the patron, makes a
statement to secure the liabilities of another (legal) person, the
protégé, against a third party. Letters of comfort show versatile
possibilities of structuring. If they are to be used as a means of
restructuring, their content is of decisive importance. In general, a
distinction is made between soft and hard letters of comfort and
between external and internal letters of comfort.
A “soft” letter of comfort is understood to be a general, purely
knowing declaration by the patron. For example, a parent company
may declare that it will stand behind its subsidiary at all times. Such
assurances and confirmations are also referred to as goodwill
declarations. The declaration does not give grounds for an obligation
on the part of the patron to provide the protégé with financial
resources. It is therefore unsuitable as a restructuring instrument.
Continued on the next slide

The letter of comfort must be
formulated in a legally sound
manner so that it is actually
able to avoid the obligation to
file for insolvency.
Letters of comfort are typically used between parent and subsidiary companies - but can also be issued by the
shareholders or externally
Selected measures to avert insolvency: Letter of comfort (II/II)
Solvency
Measure Letter of Comfort (continued)
Definition / description: Continued from previous slide:
In contrast, “hard” letters of comfort are those that oblige the patron
to establish or improve the economic performance of the protégé. The
reason given here is a contractual obligation on the part of the parent
company to provide its subsidiary with the necessary (financial)
resources. For this reason, the term "patronage contract" or
"patronage agreement" is often used in this context. The content and
scope of the obligation can be freely agreed. The wording of the letter
of comfort is therefore decisive.
Focus and effects: - Avoidance of over-indebtedness (securing of existing or new
liabilities)
- Avoidance of the obligation to file for insolvency, as the patron
vouches for the solvency
Implementation: 1. Issuance of the letter of comfort by the patron
2. Observe accounting rules for letters of comfort

Subordination means that the
creditor declares a provisional
waiver of the fulfilment of his
claim in order to put other
creditors in a better position.
Subordination of a claim may serve to avoid the obligation to file for insolvency
Selected measures for averting insolvency: subordination
Solvency
Measure Subordination of Claims
Definition / description: By means of a subordination agreement for his claim, the creditor
temporarily waives the fulfilment of his claim in order to put other
(potential) creditors in a better position or to prevent over-
indebtedness of a company within the meaning of the Insolvency
Code.
- Avoidance of over indebtedness
- Avoidance of the obligation to file for insolvency
- Creditors are subordinated in the event of insolvency
- Normally no effect on the balance sheet
Implementation: 1. It is essential to check legally secure formulation of subordination
2. Check obligations to passivation

Liquidity reserves are often
deposited with the financing
banks as collateral - in these
cases, an agreement must be
reached with the secured party
on the use of the funds, in
particular on what proportion
actually flows to the company
as liquidity - and what
proportion flows to the secured
party.
If liquidity reserves exist, releasing them is a measure that can be implemented in the short term to secure
liquidity - however, it must be checked whether the reserves already serve as a guarantee for financing
Selected measures to secure liquidity: Release of liquidity reserves
Measure Release of liquidity reserves
Definition / description: Release of liquidity reserves, for example through the sale of shares,
stakes in affiliated companies or liquidation of long-term fixed-term
deposits, etc.
- Creation of liquidity for restructuring
- Autonomous measure
Implementation: 1. Check whether liquidity reserves serve as collateral for liabilities
2. Create an overview of secured and unsecured liquidity reserves
3. Dispose of reserves that are not collateralized
4. If necessary, reach agreement with the collateral takers on the
extent to which collateralized liquidity reserves can also be used
Securing liquidity

The sale of non-operating
assets can also have positive
psychological effects. For
example, if the company's
management gives up luxury
items, this also sends a signal to
the employees.
The sale of non-operating assets can make an important contribution to securing liquidity - and in some
circumstances also send an important psychological signal to employees
Selected measures to secure liquidity: Sale of non-operating assets
Measure Sale of non-operating assets
Definition / description: Sale of assets that are not used in operations. For example:
- Sale of reserve land for expansion
- Real estate no longer required
- Machinery no longer required
- Luxury items
It is essential to consider whether these items serve as collateral for
existing financing.
Focus and effects: - Avoidance of the obligation to file for insolvency
- Autonomous measure
Implementation: 1. Check whether the assets serve as collateral for liabilities
2. Check tax effects (if there are taxable capital gains)
3. Sell the assets that are no longer needed
Securing liquidity

Optimization of the receivables
side of the business aims to
collect payments more quickly
and minimize payment defaults
or associated risks.
In some cases, considerable liquidity effects can be achieved by optimizing working capital management. In this
context, receivables, inventories and liabilities are to be optimized
Selected measures to secure liquidity: Working capital management (I/III) - Receivables optimization
Measure Working Capital Management - Receivables
optimization
Definition / description: Implementation of measures to improve the receivables side of the
business - for example, through:
- Factoring (sale of receivables)
- Optimization of the dunning process
- Shortening of payment terms
- Risk hedging (checking creditworthiness, hedging against interest
and currency risks)
Focus and effects: - Shortening of sales-to-payment cycles
- Avoidance of payment defaults
Implementation: Check the potential of the individual possible measures with external
help if necessary.
Securing liquidity

The purpose of optimizing
inventory management is to
reduce the amount of capital
tied up in order to free up
liquidity. However, care must
be taken to ensure that, for
example, there are no
production stoppages if parts
are not available.
Selected measures to secure liquidity: Working capital management (II/III) - Inventory optimization
Measure Working Capital Management - Inventory
optimization
Definition / description: Implementation of measures to reduce capital commitment in the
warehouse - for example by:
- Reduction of inventory levels (reduction of safety stock)
- Special sales campaigns
- Consignment stock
- Just in time production
Focus and effects: - Reduction of capital commitment
help if necessary.
Securing liquidity

The tight liquidity situation can
be improved in the medium
term by extending payment
terms and improving conditions
(for example, bonuses or cash
discounts).
Selected measures to secure liquidity: Working capital management (III/III) - Optimization of liabilities
Measure Working Capital Management – Optimization of
liabilities
Definition / description: Implementation of measures to optimize liabilities
- Extension of payment terms
- Negotiation of cash discounts / supplier bonuses
Focus and effects: - Creation of liquidity for restructuring
help if necessary.
Securing liquidity

Sale and lease-backs can, under
certain circumstances, generate
considerable short-term
liquidity effects. On the positive
side, the creditworthiness of
the company plays a
subordinate role here, as the
focus is on the saleability of the
asset. However, the leasing
rates are a burden on liquidity
in the long term and this is
typically a costly type of
financing.
Through sale and lease back, companies may be able to achieve significant liquidity effects by selling assets to a
leasing company and then "leasing them back" from that company
Selected measures to secure liquidity: Sale and lease back
Measure Sale and Lease Back
Definition / description: Sale and lease-back is a financing method in which companies sell
parts of their fixed assets to a leasing company and subsequently lease
them for further use.
Fixed assets include, for example, machinery, vehicles, land and real
estate. In this way, the company receives the purchase price and thus
obtains liquid funds, but can continue to use the asset. This is
particularly important for production companies that rely on the
continued use of their machinery.
When the lease expires, the company buys back the leased asset.
Focus and effects: - One-time liquidity effect
- Long-term liquidity burden
Implementation: Check if the assets serve as collateral for existing financing.
Securing liquidity

Typically, the factoring
company also takes over the
sending of invoices and the
dunning process.
Factoring is used to generate cash inflows on receivables before they fall due
Selected measures to secure liquidity: Factoring
Measure Factoring
Definition / description: Factoring is a method of financing whereby a company sells
outstanding receivables from customers before they are due to a
financial services provider, who then pays them out immediately.
Typically, a framework agreement is concluded with a factoring
company, which provides for the factoring company to purchase a
large part of the receivables (subject to a credit check) in a systematic
process.
Focus and effects: - Advance payments on receivables
- Liquidity effect
- Balance sheet effect
Implementation: - Conclusion of a framework agreement with a factoring company
- Credit check before the factoring company purchases the
receivables
- Payment by the factoring company
- The client pays directly to the factoring company
Securing liquidity

The injection of additional
capital by the shareholders is a
quick way to secure the liquidity
of the company and at the
same time improve the balance
sheet structure.
The injection of additional equity by the shareholder(s) is a quick way to provide new capital to the company
Selected measures to secure liquidity: Equity injection
Measure Equity injection
Definition / description: One speaks of a capital increase when the share capital of the private
limited company is increased by means of a formal procedure. This is
associated with an increase in the assets of the private limited
company, which in practice usually comes in the form of liquid funds.
If all shareholders contribute capital equally, the ownership, decision-
making and risk structures in the company remain the same.
Focus and effects: - Liquidity effect to avoid insolvency
- Balance sheet effect to avoid balance sheet over-indebtedness
- Can be implemented quickly (for example, no company valuation
necessary)
Implementation: Provision of additional equity by the existing shareholder(s).
Securing liquidity

A sensitive issue is the
repayment of shareholder loans
when the company is already in
crisis. The insolvency
administrator can file a
challenge against repayments if
they were made prior to the
filing for insolvency proceedings
- even if the company was not
yet in a crisis at the time of
repayment.
(Different laws apply in this
regard in different countries)
Shareholder loans are a "pragmatic" method of providing capital to the company - however, shareholder loans are
associated with risks
Selected measures to secure liquidity: shareholder loans
Measure Shareholder loan
Definition / description: The shareholder loan is a loan granted by one of the shareholders to
the company. Since this is not a capital injection, the shareholder has a
claim to repayment of the loan and can demand corresponding
interest or a share in the profits in return.
Shareholder loans are a kind of hybrid between debt and equity
financing. The shareholder concludes an ordinary loan agreement with
the company, but due to his position as shareholder he has
considerably more insight into and influence over the company than
an ordinary loan creditor. In a crisis, the repayment of shareholder
loans can be problematic.
Focus and effects: - Liquidity effect
- Economic treatment partly like equity (improvement of credit
rating)
Implementation: - Shareholder loans must provide for interest at market rates
- Shareholder loans are subordinate - i.e. in the event of insolvency
they are satisfied after other creditors.
Securing liquidity

Key Financial and
Liquidity Ratios
you need to know

Ratios provide essential
quantitative analyses,
identifying positive/ negative
financial trends which allows
businesses to create and
implement financial plans and,
if necessary, course-correct in
the short term.
The selection of the right
indicators is strongly depended
on the business model.
Financial ratios provide SMEs with ways to evaluate their company’s financial performance and allow them
compare it to other businesses in their industry
Overview about selected key financial ratios (I/II)
YOUR
TITLE
Profit Margin Ratio
Gross Profit Margin Ratio
Leverage Ratios
The gross profit, or gross margin, ratio measures how much money you have from sales
after subtracting the cost of goods sold (COGS). Gross profit shows you how much
money on the Euro your business earns.
Leverage ratios are there to compare the debt to equity levels of your SME in order to
finance operations and can help give an idea of how these changes in output will affect
the income as a result, something that’s well worth investigating before you borrow.
The profit margin ratio is a percentage that shows you how much you earn after
deducting all expenses. This is the leftover money after you subtract expenses like
overhead and operating costs.

Ratios provide essential
quantitative analyses,
identifying positive/ negative
financial trends which allows
businesses to create and
implement financial plans and,
if necessary, course-correct in
the short term.
The selection of the right
indicators is strongly depended
on the business model.
Financial ratios provide SMEs with ways to evaluate their company’s financial performance and allow them
compare it to other businesses in their industry
Overview about selected key financial ratios (II/II)
Quick Ratio
Return on Investment
Current Ratio
Also known as the acid test, the quick ratio is used to evaluate your company’s ability
to meet short-term financial obligations. They only measure short-term liquidity, so
don’t include inventory.
The ROI ratio shows how much your company has gained from the investment you’ve
made. The resulting figure is a percentage that will help you determine which
investments were successful and which weren’t.
The current ratio also measures your ability to pay long-term debts. Thus, it looks at how
many assets, including inventory, the business has compared to its liabilities. This is
used to calculate whether you can meet current and future financial obligations.

Sometimes referred to as the
gross margin ratio, gross profit
margin is frequently expressed
as a percentage of sales.
Gross profit margin is a metric analysts use to assess a company's financial health by calculating the amount
of money left over from product sales after subtracting the cost of goods sold (COGS).
Selected key financial ratios: Gross Profit Margin
What does it
tell you
If a company's gross profit margin wildly fluctuates, this may
signal poor management practices and/or inferior products. Such
fluctuations may be justified in cases where a company makes
sweeping operational changes to its business model, in which
case temporary volatility should be no cause for alarm. E.g. if a
company decides to automate certain supply chain functions, the
initial investment may be high, but the cost of goods ultimately
decreases due to the lower labour costs.
How to
calculate
Formula
A company's gross profit margin percentage is calculated by first
subtracting the cost of goods sold (COGS) from net sales (gross
revenues minus returns, allowances, and discounts). This figure
is then divided by net sales, to calculate the gross profit margin
in percentage terms.

While this figure still excludes
debts, taxes and other non-
operational expenses, it does
include the amortization and
depreciation of assets.
A slightly more complex metric, operating profit also takes into account all overhead, operating,
administrative and sales expenses necessary to run the business on a day-to-day basis.
Selected key financial ratios: Operating Profit Margin
What does it tell
you
A company's operating profit margin ratio tells you how well the
company's operations contribute to its profitability. A company with a
substantial profit margin ratio makes more money on each EURO of sales
than a company with a narrow profit margin.
How to
calculate
Formula
1. Find the operating income (EBIT) by subtracting its operational
expenses, allocated depreciation, and amortization amounts from gross
income.
2. Find the net sales revenue. This requires no calculation because the
sales shown on the company's income statement are net sales. If that
figure is unavailable, you can calculate net sales by taking the
company's gross sales and subtracting its sales returns, allowances for
damaged goods, and any discounts offered.
3. Calculate the operating profit margin ratio by dividing the figure from
step one (operating income) by the figure from step two (net sales).

Comparing different periods,
the Net Profit Margin only
reveals reliable results if
nothing else has changed in
your expenses.
The net profit margin can be used to compare performance over different periods
Selected key financial ratios: Net Profit Margin
What
does it
tell you
The net profit margin can indicate how well the company converts its
sales into profits. This means that the percentage calculated is the % of
your revenues that are profitable. It also indicates the amount of
revenue you are spending to produce your products or services.
How to
calculate
Formula
1. You'll have to calculate net profit and net sales, as there are generally not
line items labelled as such on the income statement. Net profit is
calculated by subtracting all of your expenses from your revenues. These
include wages, salaries, utilities, or other expenses.
2. Net sales is the result of subtracting your allowances, returns, and
discounts from your total revenue. Allowances stem from problems with a
product or service which required you to reduce the price to satisfy the
customer. A return is the return of an item or a refund for a service.

The Quick Ratio tests, how
much the company has in assets
to pay off all of its liabilities.
Assets include cash, accounts
receivable, short-term
investments, and inventory. The
quick ratio offers a more
stringent test of a company's
liquidity than the current ratio.
The quick ratio—sometimes called the quick assets ratio or the acid-test—serves as an indicator of a company's
short-term liquidity, or its ability to meet its short-term obligations.
Selected key financial ratios: Quick Ratio
What
does it tell
you
The quick ratio formula removes a firm's inventory assets from the equation.
Inventory is the least liquid of all the current assets because it takes time for a
business to find buyers if it wants to liquidate the inventory and turn it into
cash. If a company's quick ratio comes out significantly lower than its current
ratio, this means the company relies heavily on inventory and may be sorely
lacking other liquid assets. The quick ratio assigns a EURO amount to a firm's
liquid assets available to cover each EURO of its current liabilities. Thus, a quick
ratio of 1.75X means that a company has €1.75 of liquid assets available to
cover each €1 of current liabilities. The higher the quick ratio, the better the
company's liquidity position.
How to
calculate
Formula
You can calculate the quick ratio from balance sheet data
using this formula:

The current ratio shows how
many times over the firm can
pay its current debt obligations
based on its current, most liquid
assets.
The current ratio is used to evaluate the firm's ability to pay its short-term debt obligations, such as accounts
payable (payments to suppliers) and taxes and wages.
Selected key financial ratios: Current Ratio
What
does it
tell you
If a business firm has €200 in current assets and €100 in current liabilities,
the calculation is €200/€100 = 2.00X. The "X" (times) part at the end means
that the firm can pay its current liabilities from its current assets two times
over.
This is a good financial position for a firm, meaning that it can meet its
short-term debt obligations with no stress. If the current ratio is less than
1.00X, then the firm would have a problem covering its monthly bills. A
higher current ratio is typically better than a lower current ratio with regard
to maintaining liquidity.
How to
calculate
Formula
The current ratio is calculated from balance sheet data using the
following formula:

The Return on Investment is as
useful in evaluating the
potential return from a stand-
alone investment as it is in
comparing returns from several
investments.
Return on investment (ROI) is a financial metric of profitability that is widely used to measure the return or
gain from an investment. ROI is a simple ratio of the gain from an investment relative to its cost
Selected key financial ratios: Return on Investment
What does
it tell you
• Return on investment (ROI) is a rough measure of an investment's profitability.
• The metric has a wide range of interpretations, such as the profitability of stock
investment, purchasing a new manufacturing plant, or the result of a real estate
transaction. ROI is comparatively easy to calculate and understand, and its
simplicity means that it is a standardized, universal measure internationally.
• On the downside, ROI doesn't account for how long an investment is held,
making comparing investments less useful to an investor than a measure that
incorporates the holding period.
How to
calculate
Formula
The ROI is calculated by dividing the net return on investment by the cost of
investment and multiplying by 100% or by subtracting the initial value of the
investment from the final value of the investment, dividing this new number by the
cost of the investment and multiplying it by 100%.
OR

The liquidity ratios are a result
of dividing cash and other liquid
assets by the short-term
borrowings and current
liabilities. They show the
number of times the short-term
debt obligations are covered by
the cash and liquid assets. If the
value is greater than 1, it means
the short-term obligations are
fully covered.
Liquidity ratios are the ratios that measure the ability of a company to meet its short-term debt obligations
Overview about selected liquidity ratios
Debt-to-Assets
Ratio
Debt-to-Equity
Ratio
Debt-to-Capital
Ratio
Debt-to-EBITDA
Ratio
Asset-to-Equity
Ratio
= Total Debt / Total Assets
= Total Debt / Total Equity
= Total Debt /
(Total Debt + Total Equity)
= Total Debt / Earnings Before Interest Taxes
Depreciation & Amortization (EBITDA)
= Total Assets / Total Equity

• Liquidity crisis: What happens & how to solve it? | Agicap
• This is how good liquidity planning works | finway
• A clear path towards short-term liquidity visibility for SMEs (assets.kpmg)
• Zwißler et al (2013): Lean and Proactive Liquidity Management for SMEs, Procedia CIRP Vol. 7, P. 604-609 ((PDF) Lean
and Proactive Liquidity Management for SMEs (researchgate.net))
• Understanding Liquidity Ratios: Types and Their Importance (investopedia.com)
• What do SMEs need to consider when applying for a loan? - Accounto | Digitale Buchhaltung
• Diez et al (2021): Insolvency Prospects Among Small and Medium Enterprises in Advanced Economies: Assessment
and Policy Options, Staff Discussion Notes No. 2021/002( Insolvency Prospects Among Small-and-Medium-Sized
Enterprises in Advanced Economies: Assessment and Policy Options (imf.org))
Short but interesting articles that we find enlightening…
Recommended Reading

FUNCTIONAL COMPETENCIES
Next: Module 5
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