Jul 26, 2023
·
5
min. read
Business Planning & Growth

Everything you need to know about insolvency and its early detection

Updated:
Jul 26, 2023

The economic aftermath of the pandemic is still being felt, and now inflation and current global politics are creating new uncertainties and bottlenecks for companies of all sizes and sectors. Due to the economic impact of the pandemic alone, up to 25,000 insolvencies are expected in 2022—primarily among small businesses. Insolvency seems to hang over many entrepreneurs like a sword of Damocles, but what exactly is insolvency? When is it a risk? And what are the consequences for a company?

Everything you need to know about insolvency and its early detection

What is insolvency?

Fundamentally, a company must have sufficient liquid funds to meet its payment obligations—including salaries, rent, liabilities, and incoming invoices. If a company cannot guarantee its solvency, or if another ground for insolvency applies, insolvency threatens. From this point on, the entrepreneur or managing director is obligated to file for insolvency proceedings.

The 3 grounds for insolvency

The statutory grounds for insolvency obligate managing directors to file for insolvency. The German Insolvency Code (InsO) distinguishes between general and specific grounds for insolvency. The general ground describes the state of illiquidity (§ 17 InsO). The term "general" indicates that illiquidity applies as a ground for opening proceedings regardless of the debtor or type of proceeding. Over-indebtedness (§ 19 InsO) is relevant as a specific ground for legal entities and equivalent legal forms. In addition to these two grounds, there is impending illiquidity (§ 18 InsO) as a "voluntary" ground for insolvency, which permits the debtor to file an application voluntarily.

Illiquidity (§ 17 InsO)

Illiquidity occurs when a company can no longer meet its payment obligations as they fall due and is likely permanently unable to do so. Illiquidity is determined by comparing liquid funds against liabilities due (liquid funds / liabilities due). If the result of this calculation is less than 0.9—meaning less than 90%—the company is considered illiquid.

Subsequently, it is determined whether the company can resolve the illiquidity within the next three weeks. The calculation for this step is based on forecasts and is as follows: liquid assets + future incoming payments (three weeks) / due liabilities + liabilities becoming due (three weeks). If this quotient is also less than 0.9, i.e., less than 90%, then according to the Federal Court of Justice (BGH), illiquidity exists and an insolvency application must be filed.

Over-indebtedness (§ 19 InsO)

Over-indebtedness under insolvency law exists when there is a negative going-concern forecast and balance-sheet over-indebtedness is established through an over-indebtedness status statement. This balance sheet requires preparing both the over-indebtedness status and a forecast regarding the viability of continuing operations under this status.

Imminent illiquidity (§ 18 InsO)

Impending illiquidity arises when the debtor is likely to be unable to meet its payment obligations as they fall due. It grants the debtor alone the right to file an early application to open insolvency proceedings.

Obligations for the managing director

In conducting their business activities, managing directors must meet heightened duties of planning, monitoring, and control. This includes safeguarding solvency by maintaining sufficient liquidity. In the event of illiquidity or over-indebtedness, directors of a corporation (e.g., GmbH or AG) are required by law to file for insolvency; in the event of impending illiquidity, they have the right to do so. Under Section 15a of the German Insolvency Code (InsO), an application for insolvency proceedings must be filed within three weeks of a ground for insolvency arising. Failure to comply with this requirement constitutes a criminal offense of wrongful delay in filing for insolvency.

Triggers for corporate insolvency

Insolvency can be triggered by many different factors. In most cases, however, insolvency cannot be attributed to a single trigger, but rather a combination of the following factors:

  • Lack of or poor management in cash flow management, controlling, or accounting
  • Decreased revenue due to external factors (such as restrictions from the COVID-19 pandemic) or internal developments (such as a lack of competitiveness)
  • Deteriorated liquidity due to, for example, suboptimal invoice and receivables management
  • Increased costs with stagnant revenue due to, for example, higher personnel or rental costs

Early detection through liquidity management

These triggers show that insolvency can threaten anyone whose monitoring mechanisms do not function properly. However, declining revenues coupled with rising costs should serve as a serious warning sign of an adverse trend for any business owner. If the company still has sufficient liquid funds, this downturn does not necessarily have to end in insolvency. To accurately assess the risk of impending insolvency, it is vital to keep a close eye on your own liquidity at all times and assess it correctly.

To achieve this, reliable and precise liquidity planning and proactive cash management are essential: costs must be strictly controlled and reduced wherever possible, outstanding receivables collected promptly, and sales increased. Tidely enables accurate, holistic liquidity planning, supporting managing directors as a central tool for crisis monitoring and control.

With smart tools, Tidely highlights liquidity bottlenecks at a glance, while also identifying opportunities to secure and increase cash flow. Comprehensive real-time liquidity reporting illustrates the company's insolvency risk using an intuitive traffic-light model. Based on projected figures, the radar compares today’s solvency with that in three weeks, giving business owners the necessary foresight into future liquidity trends. Achieving the most accurate assessment possible requires diligent monthly planning. The insolvency radar acts as an early warning system for impending insolvency, helping directors fulfill their corporate governance duties.

Keep track of your finances at all times with Tidely and identify the risk of impending insolvency early thanks to intelligent planning mechanisms. Learn more about our liquidity management here.

About the author

Martin Eyl: CFO at Tidely
Martin Eyl: CFO at Tidely
Chief Financial Officer

Martin Eyl is the CFO of Tidely. With his extensive experience in cash management and as a CFO, he drives the company's financial strategy and growth. Previously, he led startups such as M.I.T e-Solutions and PIPPA&JEAN.

Martin Eyl: CFO at Tidely
Martin Eyl: CFO at Tidely
Chief Financial Officer

Have questions about Tidely?
We look forward to hearing from you.

Get in touch

Latest articles

Cash Flow Software: The 10 Best Tools Compared for 2026
March 18, 2026
·
18
min. read

Cash Flow Software: The 10 Best Tools Compared for 2026

Professional financial planning does more than just protect against cash shortages; it is a key driver of long-term growth. Specialized cash flow software helps you keep an eye on your liquidity at all times, identify bottlenecks early, and take targeted countermeasures. At the same time, it supports strategic investment decisions and enables forward-looking financial planning. As the provider of Tidely, we are convinced that our cash flow management software is one of the best solutions on the market. However, we know that every company has different requirements. That is why you will find an objective comparison of the best tools for 2026 here, so you can choose the solution that truly fits your needs. To create this, we reviewed the websites of various providers, multiple comparison sites, and user reviews, and summarized our findings here.

Interim financing for businesses: Bridge loans for fast liquidity
February 6, 2025
·
6
min. read

Interim financing for businesses: Bridge loans for fast liquidity

Interim financing can be a vital tool for your company to bridge short-term liquidity bottlenecks or close funding gaps when planned funds are not yet available. This type of bridge loan is often used to pre-finance projects or large orders until customers make their promised payments. It is also used by start-ups, for example, to bridge the time until a confirmed funding round, or to finance investments like machinery until they are covered by an agreed lease or a committed long-term loan. But how does interim financing work and what are the costs involved? In this article, we answer these and other questions and show you how to optimally use interim financing for your company.

Liquidity Planning: Guide, Example & Template for 2026
June 10, 2026
·
15
min. read

Liquidity Planning: Guide, Example & Template for 2026

In this guide, you will learn step-by-step how to create a cash flow plan, which mistakes to avoid, and why 13-week planning is becoming the standard. Includes a concrete example, template, and practical tips.

Try Tidely free for 7 days

Simplify your cash flow forecasting with Tidely and make informed decisions for sustainable growth.

Developed and hosted in Germany
Bank-level encryption
GDPR compliant
Book a consultation now