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INSOLVENCY PROPHYLAXIS FOR SMALL ENTERPRISES

Contact: Rudolf Grünbichler
Cooperation Partner: KSV1870 - Association for the Protection of Creditors

Small businesses are disproportionately affected by insolvency — what can be done to prevent this? The Degree Programmes in Financial Accounting & Management Accounting at CAMPUS 02 University of Applied Sciences are working on resolving the issue.

Business insolvencies can cause damage running into billions. The ones affected are primarily the entrepreneurs themselves and their creditors, but also society due to a loss in tax revenue. In addition, insolvency can cause the affected entrepreneurs to have existential fears and conflicts with their family, to be socially marginalised and to suffer from deteriorating health.

In a joint project with the Association for the Protection of Creditors, the Kreditschutzverband 1870 (KSV1870), the causes forcing Austrian businesses into insolvency were investigated and indicators that can detect strategic and revenue crises were identified and developed.

© grasko/shutterstock.com
© grasko/shutterstock.com

What poses a challenge for small businesses is that they usually calculate profit on the basis of revenue-expenditure accounting, which means that entrepreneurs miss relevant information for successful management control (e.g. lists of vacancies, records of liabilities). Small businesses often lack time resources and/or the expertise for risk recognition and management. Past experience has shown that they react only when they have problems with paying bills (known as a liquidity crisis). Financial crises of businesses can be categorised as strategic, revenue and liquidity crises. The crisis with the most far-reaching consequences is the strategic crisis and is the one that small businesses tend to overlook. Overlooking a strategic crisis results is a revenue crisis, which is characterised by signs of decreasing profit. In the hope that the situation will improve, micro businesses, in particular, tend not to take action nor seek professional advice.

 

It was this issue that the research project focussed on. The first phase of the project consisted of searching relevant literature and applying methods, such as brainstorming together with tax consultants, to identify and develop insolvency indicators that reveal strategic and revenue crises. The next phase involved turning these indicators into a checklist of questions on an Excel spreadsheet. The aim was that when users go through this checklist (once a month), they receive an overview of their business’ performance and find out whether a strategic crisis exists.

 

So how can causes for insolvency be prevented as far as possible?

“The challenge was to identify the indicators that signal negative development”, Rudolf Grünbichler explains in a nutshell. Since small businesses often only have little information for successful management control, the indicators that can be used for performance estimation have to be filtered out.

The result of the project is impressive: The tool developed by a team of experts enables entrepreneurs to continuously measure their performance, to detect negative developments and to prevent larger financial damage to their business. By going through the indicator checklist each month and measuring the development of these indicators over time, entrepreneurs can examine their performance and decide whether they should consult a business professional or not. The tool is being constantly improved and tested in companies in cooperation with the Association for the Protection of Creditors.