SMEs Arm Themselves Against the Growing Threat of Zombie Companies

Halloween may be over, but they walk among us, even though the life force has long since left them, sucking resources like vampires blood and paralyzing the economy: zombie companies.

According to Study by the Institute for Economic Research Halle (IWH) There were more insolvency cases in June than in seven years. The number of cases rose by 48 percent compared to the previous year. At the same time, the threat of zombie companies is spreading worldwide, including in Germany. “Zombies” are those companies that have existed for at least ten years and cannot cover their interest burden on borrowed capital with their profits in three subsequent years.
Peer Hitschke, Risk Expert at credit agency Creditsafe Germany, explains how entrepreneurs can protect their own business if their business partners and customers are zombified and what the principles of working capital management are all about.

More zombies than expected? SMEs – The hidden danger

An analysis of the FTI-Andersch looked at around 2,900 companies in Europe. The result: Around 6 percent of the German companies examined are “zombies”. This puts the Federal Republic in the lower middle in an international comparison. But be careful: Unlike their listed competitors, SMEs are sometimes subject to less strict reporting requirements in the event of financial difficulties. Since she with 94 percent However, since they account for a significant proportion of gross domestic product, the situation in Germany could be more serious than the official figures suggest.

Recession, interest rate hikes, etc.: The threat from the undead is growing

The currently increased interest rate level not only puts a strain on existing zombie companies, but also encourages the emergence of new undead – especially those whose business model is too dependent on external financing due to the previous low interest rate policy. Together with the current weak economic outlook and a record rate increase in key interest rates, these circumstances provide the ideal breeding ground for such financing risks. The prospects for companies that stayed afloat with debt financing during the past crisis management are therefore bleak. Banks are currently extremely cautious about such refinancing and are well aware of the risks of default on receivables.

Armed against mutations: Working capital management as a zombie protective shield

Working capital is an important parameter for assessing the liquidity and efficiency of a business and describes the capital that the company needs to carry out its operational business. Successful working capital management ensures that a company’s liquidity is increased through more efficient handling of assets and liabilities. In this way, companies can protect themselves from payment defaults and other unforeseen financial challenges. The principles of working capital management can protect companies from mutating into zombies themselves:

Principle 1: Trust is good, control is better

The most important thing to avoid becoming a zombie is to keep an eye on your allies. To do this, companies should regularly check and monitor the creditworthiness of their customers, business partners and suppliers. Controls should be anchored in the regular process in order to minimize payment defaults as best as possible. Even with long-term partnerships, it is worth using tools from established credit reporting agencies such as Creditsafe to provide meaningful information Company information to catch up.

Principle 2: Identify risks, recognize crises early

External events, such as B. Lack of skilled workers, weather influences or delivery bottlenecks often catch companies unprepared. Even a long-standing business partner can falter financially. To avoid unpleasant surprises, business owners should always keep an eye on their most important partners and serious developments in their industry. Monitoring-Tools or free Industry checks can provide additional support.

Principle 3: Efficient receivables management

Receivables management plays a crucial role in working capital management. Here, just a few measures can achieve great success. For example, companies should rely on individual payment methods (invoice, immediate payment or appropriate credit limits). Credit score and credit limit of your business partner. Shorter processing times also help to pay outstanding invoices promptly. In principle, the following applies: faster receipt of payments increases the company’s liquidity and reduces the risk of payment defaults. The capital thus released can ultimately be used for more urgent liabilities, such as: B. for short-term purchases or new growth projects.

Conclusion: Well protected is half the battle

Zombie companies are threatening the economy worldwide, and Germany is not safe from the undead either. Rising insolvency rates, the effects of the key interest rate increase and fears of recession are exacerbating the situation – medium-sized businesses in particular are in danger. Instead of letting the threat of zombification happen idly, companies should now act proactively and, above all, preventively in order to avert greater damage from insolvent business partners. Effective working capital management is one way to operate successfully in a dynamic economic environment and survive the next zombie wave unscathed.