When is a company in trouble?

The global economy is upside down and bankruptcy applications are piling up. This creates a lot of uncertainty in the economy. Unfortunately, some start-ups and entrepreneurs miss the right time to seek support in the form of advice or financing. the most important cornerstones when and how to act as an entrepreneur are summarized in this article.

When is a company in trouble?

A company is basically in trouble when operations are fundamentally disrupted at one or more levels. Furthermore, these companies require a intense external assistanceto restore their performance and competitiveness.

At legislative level, the definition for the Guidelines on State aid for rescuing and restructuring non-financial firms in difficulty (2014/249/01) is summarized as follows for a firm in difficulty (depending on legal form):

“In the case of limited liability companies , at least half of the paid-in share capital must have been lost due to accumulated losses.”

Important: if, after deducting the accumulated losses from the reserves, the cumulative amount is negative, equal to more than half of the subscribed share capital, the company is considered to be in difficulty.

“In the case of companies in which at least some shareholders are fully liable for the company’s debts , more than half of the equity shown in the business books must have been lost as a result of accumulated losses. The sole proprietorships and freelancers are also classified here.”

The sum of the difficulties in a company often leads to the economic distress of the operation. This imbalance in turn forces companies to act. There are many levels at which adjustments can be made so that the profitability of a company is restored.

In order to find out which problems prevail in a company, an in-depth status quo analysis be performed. If the financial means allow it, it is always advisable to have this analysis carried out by a competent consultant. No time should be wasted, especially in situations where only a few financial resources are available. If the wrong measures are taken at this point to restore profitability, this costs important time and therefore money.

Reasons for difficulties in a company

In order to find out as early as possible why your own company has gotten into financial difficulties, the various levels of the possible sources of interference of the company are considered. If an entrepreneur systematically examines all levels of the company, the first problems can already be identified. This preliminary analysis can help the entrepreneur to seek professional advice.

In principle, even entrepreneurs who do not suspect that their company is in financial difficulties, for example due to a liquidity bottleneck, should regularly analyze certain levels. This guaranteed maximum overview about the business processes and helps to optimize operations. The factors that can lead to difficulties for the company have been summarized below:

Too little turnover

The most obvious reason for trouble in a business is when sales are missing or significantly below expectations. If too little money ends up in the business account, this is quickly noticed. But what are the reasons for the loss of sales?

  • Marketing and advertisement: The first impression that the customer gets of the company is fundamental for the further relationship with the customer. Therefore, as part of the marketing strategy, it should be checked whether the physical and digital presence of the company is at the best possible level.

Here it is helpful, for example, to ask outsiders to evaluate the company’s website. Particular focus should be on the comprehensibility of the information provided regarding the product and the general impression (professionalism and (un)seriousness). If the business model uses other forms of advertising, such as print media, it can be considered whether new advertising and marketing channels can be opened up.

  • Excursus “Call-2-Action”: This is one of the most important elements of a company’s website. “Call2Action” means that the potential customer is encouraged to take a specific action on the website.

“Call2Action buttons” are particularly effective, guiding the customer through the website to the desired action (usually selling the product). In order to optimize this process in a targeted manner, the registration rate or the contact rate of the newsletter and contact form can serve as a control metric.

Furthermore, the website is equipped with A/B tests or multivariate tests that randomly direct users to the different versions of the website. In this optimization phase, the different versions that differ in font, color and/or content are tested against each other.

Appropriate specialist advice: management consultancy, marketing agencies and freelancers

    • distribution: If a customer is now fundamentally interested in the product but drops out shortly before closing the deal, then it can be assumed that there is a disruptive factor in sales. It is worth examining the entire distribution chain. Is there potential for optimization?

Appropriate specialist advice: business consulting

  • Product: If neither advertising nor sales efforts increase sales, it may be that the product or service is not accepted by the customer. In order to find out whether the lack of sales is due to the lack of interest on the part of customers, it is important to question this. Here it is advisable to survey a representative group of potential customers in the form of a personal or digital interview. These interviews serve to better understand the customer and to determine why the product offered does not appeal to the target group. It is worth starting the surveys with an open mind and always being open to requests for changes and suggestions for product optimization. In addition, paid services from market research companies can provide impetus for product optimization. The most important thing here is that the customer benefit, which usually arises from a problem for the customer, is recognized and clearly communicated.

Appropriate specialist advice: Management consultancy, market research institutes

Too high costs

Another level why a company can get into trouble is that excessive costs negatively affect liquidity. Often some costs in operation can be significantly reduced.

  • cost of goods: If the product or service incurs direct costs through the purchase of raw materials or the use of finished end products, it can be analyzed whether savings are possible by changing suppliers or adjusting the selection of raw materials/products.

Appropriate specialist advice: management consultancy

  • Fixed costs: This item should be looked at particularly carefully, since the sum of fixed operational costs often causes a company to be mismanaged. The fixed costs range from personnel costs to maintenance contracts and rental costs. Each item should be analyzed in detail for savings potential.

Appropriate specialist advice: business consulting

Advice comes before financing

If a company gets into difficulties, the damage can often only be cushioned by external financing. Most measures to eliminate sources of interference take a certain amount of time to become effective. Especially for these “bridging times” it is worthwhile to have a external financing of the company to think. However, these financiers are interested in the fact that the applicant has taken all measures to make the company more economical. This should mean that the application documents must contain a clear risk analysis and a catalog of measures as well as a bankable business plan and financial planning. In order to increase the chances of financing here, a management consultancy should be commissioned by this time at the latest to prepare or review the financing documents. For “companies in difficulty” the state subsidizes up to 90% of the costs for company/start-up advice (service tip: do a subsidy check and find a consultant).