Help yourself

During the crisis, small and medium-sized companies learnt to dig out liquidity – that also helps them now to grow during the upswing


By Julia Leendertse

For Thomas Koch, the cash-for-clunkers program had been both a blessing and a curse. The head of a large Berlin-based automobile dealership group with 250 employees just had had to cut back his expansion plans in Poland because of the economic and financial crisis when customers snatched up the subsidized compact cars from the car dealer for Mazda, Volvo, Citroen and Skoda in the spring of 2009. "Within three months, we sold an additional 800 new cars", says the Chairman of the Board of the Koch Group Automobile AG.

A blessing – but also a curse. Already knocked around by the financial crisis, the medium-sized business had to extend a bridge-over loan for the delivery of every vehicle – altogether a seven-digit amount. Koch: "We only survived that because we had rigorously cut back all our other outflow of funds – we did without advertising, we laid off personnel, and we strictly coordinated all flows of money."

Successfully so! In 2010, the Koch Group actually had ten percent less in sales than in the previous year: "Nonetheless, we emerged stronger from the crisis. We had learnt to optimally utilize our working capital", says car dealer Koch.

Holding onto the money

If banks won't help, you'll have to help yourself: That was the first lesson small and medium-sized businesses had to learn during the crisis. Their most important instrument became internal financing – thus, making full use of their own profits for investments and digging out unnecessarily tied-up capital. The second lesson: If you were able to overcome the crisis on your own, banks would again be willing to make a commitment. In the future, bank loans still remain the most important financing source for small and medium-sized businesses; but banks will lend money only to those having a high equity capital rate and strict liquidity management.

Managers are just dealing with the third lesson, and not all of them have understood it already: Even if cash tills are ringing again during the economic upswing, companies must hold onto their money. Any sloppiness is immediately avenged – for instance, making allowances in terms of supplier prices, excessive warehousing, or too many concessions regarding customers' terms of payment – and the lending banks' goodwill is put at risk.

That message has not yet been received everywhere in Germany's small and medium-sized businesses. This is shown by a study of the Institut für Demoskopie (Institute for Public Opinion Research) in Allensbach and the University of St. Gallen on behalf of the Düsseldorf-based consultancy Kerkhoff Consulting. The survey conducted this spring with 500 small and medium-sized companies of the producing industry has shown that 74 percent of those interviewed do in fact expect a positive business development in 2011. But it also shows that especially small companies are sloppy in their liquidity management, have little cost awareness and thus not enough equity capital which, in turn, jeopardizes their credit standing with the banks.

Reducing working capital
What's hard to understand: "Those having to rely the most on outside capital and thus on banks need to catch up the most in terms of liquidity management", says Kerkhoff consultant Andreas Leimbach. Just every third medium-sized enterprise with annual sales between € 10 million and € 50 million and a workforce of a maximum of 250 employees is doing something to reduce its working capital.

In at least half of the larger enterprises with sales between € 50 and 250 million and up to 1,000 employees, the topic of working capital management is a permanent item on the agenda. And it's even nearly two-thirds with regard to very large enterprises with sales of more than € 250 million and more than 1,000 employees.

So it's logical that especially the smaller enterprises want to become independent of the financial institutions: "Even the higher medium-sized companies are aiming at more independence from the banks", says Volkhard Emmrich, Managing Director of the Munich-based consultancy Dr. Wieselhuber & Partner for small and medium-sized companies. At the same time, alternative sources of financing also get more and more interesting even for small and medium-sized businesses – such as bonds which had so far been a domain of large-sized enterprises. Emmrich: "Even family-owned companies which tend to be more reserved are willing to meet the transparency requirements of the capital market to become more independent of the banks".

Banks in search of customers

That worked well for the machine manufacturer Dürr or the distillery Underberg: Both have recently placed bonds in the new medium-sized company segment of the Stuttgart stock exchange. However, that's no solution for the majority of small and medium-sized companies: "Going to the capital market only pays for companies needing millions in the high double-digit range for investments, growth, or refinancing", says consultant Emmrich, "otherwise bond financing will be too expensive". Accordingly, bank loans will remain the most important source of outside financing for most small and medium-sized companies.

Actually, chances for it are not bad either: "Banks are looking for customers again, because new business had been low for a long time", as Emmrich observed. For small businesses, loans can be had at favorable terms from savings banks (Sparkassen) and from credit unions (Volksbanken). Larger medium-sized companies should rather contact institutions like Commerzbank, Deutsche Bank or Bayern LB.

But banks don't take just any customer. Decisive is the rating by means of which banks assess the creditworthiness of their potential borrowers. However, for many companies it's rather difficult to evaluate how the rating comes about and how chances for a loan can be improved: Only 30 percent of the small and medium-sized businesses with less than one million euros in sales even know their rating level, as shown in a study by the development bank KfW. "Financial institutions, on their own, will much more frequently tell larger companies their rating level and talk to them much more intensively about the background of their rating than to smaller companies", says Margarita Tchouvakhina, Departmental Director in the Department of National Economy of KfW.

That can only be changed if the small and medium-sized companies become active themselves. "If a company wants to know how its rating can be improved, it should specifically ask its principal bank for explanations and suggestions", advises the KfW economist. It's important to constantly keep open the communications channel to the principal bank: "Many small and medium-sized companies just send their bank the annual statement of accounts once a year. But that's no longer enough", says Martin Conrad from the Berlin-based auditing company PKF Fasselt Schlage. "Banks have increased requirements of their borrowers and also want to be informed during the year."

However, best communications are useless if the company does not have its own high self-financing power. That means: In essential parts, the company should be able to finance itself on its own. And here the circle is closed: A company's liquidity management must work well to maintain its creditworthiness with banks. The crux of the matter is: What many small and medium-sized businesses had very successfully done during the crisis is getting more and more difficult in the economic upswing. "Because they all knew that securing liquidity was vital, the purchasing department, the financial department, production and sales all joined forces", says Kerkhoff consultant Leimbach. Now, however, old conflicts of goals would come up again between the departments. "Instead of working together, they are frequently rather working against each other."

"The purchasing job is becoming more and more difficult due to highly fluctuating materials and commodity prices and frequently also longer delivery periods", says Erik Hofmann, Head of the Kerkhoff Competence Center of Supply Chain Management at the University of St. Gallen. "Purchasing frequently has no choice – it must stock up to be on the safe side and to avoid bottlenecks."

Those having calculated too closely will know at least since the triple disaster in Japan how fast this can result in a stop of the production lines. The right way is a tightrope walk. "Laisser-faire in liquidity planning can be dangerous over the long run – especially for smaller companies", warns Markus Kraemer, head of the Cologne-based TMS consultancy for small and medium-sized companies. Such companies will then soon have a bad standing with banks. On the other hand, the classical small and medium-sized company finds it difficult to let a customer go just because he wants to unduly extend his time for payment. The risk will thus increase to slip into bankruptcy due to a lack of liquidity.

Great discipline
Claus Dillenburger successfully mastered this balancing act. He is the Managing Director of the Cologne-based medium-sized company which provides office buildings, hospitals, sports stadiums with air conditioning, ventilation, refrigeration engineering and building services. From the banks' point of view, rather a medium-sized fish with its € 30 million in sales, the Dillenburger Group of companies acquired a good reputation both with banks and customers due to its strict project management. Smooth collaboration of the individual trades is vital: "Any delay burdens our liquidity; accordingly, professional liquidity management is a fixed component part of our business model", says the Managing Director Dillenburger. "It actually takes great discipline to synchronize work performance and flow of money, but at the end of the day, it will make everybody happy: customers, suppliers and banks."

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