Logo Created with Sketch. SCHUMANN - EN

Effects of Rising Energy Prices for Credit Management

In the current situation of rising energy prices, the energy flat rate and inflation compensation premiums create relief for private individuals. But what does it mean for companies? And what about credit management? Read more about this in SCHUMANN Insights.
Schumann Insights, Blog post, Videos
22.11.2022, Prof. Dr. Matthias Schumann

What Are the Consequences of Rising Energy Prices for Credit Management?

The German government has adopted a support package for private individuals in the form of the flat-rate energy allowance. In addition, there are other support options such as the inflation compensation premium. However, this only applies on condition that companies can afford it despite their own burden. What does this mean for credit management? Read more in SCHUMANN Insights.

Relief Packages for Private Individuals

For private individuals, the German government has launched the energy flat rate. Alongside this, employers can provide employees with a tax- and contribution-free bonus of up to €3,000, such as the inflation compensation bonus. In addition, there are further reliefs for private individuals.

Companies therefore can support their employees. The only requirement is that companies must be able to afford it, despite their own burden from rising prices. Energy-intensive companies are particularly affected. Besides, the legal regulations create further operational administrative expenses.

Possible Support for Companies

An energy cost containment program is planned for companies, but there are still many unanswered questions, such as whether and how energy costs should be capped. Kfw loans are intended to provide a remedy. Furthermore, insolvency law is to be relaxed, particularly in the area of over-indebtedness, so that companies that are still solvent but over-indebted do not necessarily have to file for insolvency.

How Can Companies Proceed from a Credit Management Perspective?

From a credit management perspective, the following issues arise:

As energy price increases directly affect consumers and product price increases due to energy costs in production, for example, the general consumer climate is dampened. In this area, the sales expectations of companies are to be estimated conservatively. In particular, companies that have operated with positive results close to the break-even point in the retail and production of consumer goods could thus find themselves in the red. This needs to be examined.

Energy cost-intensive companies also must cope with significantly increased cost pools. If this cannot be passed on via the price, then the company quickly enters the loss zone with a corresponding outflow of liquidity. Although KfW loans can be used to secure liquidity, they increase debt and the long-term interest burden. These strains also need to be closely examined in terms of cash flow.

One possible strategy for companies that are energy-intensive in some areas would be to scale back production, although this would lead to a loss of sales. The extent to which fixed costs are then retained must also be critically scrutinized. Secondary effects are product shortages on markets, which can have further consequences for intermediate products.

In all these investigations, it must be considered that in the long-term energy costs will certainly remain at a significantly higher level than prior to the sanctions and the subsequent supply restrictions.

When suspending the filing for insolvency due to over-indebtedness, the question arises as to whether this regulation applies at all. What is important in the current situation, with corresponding cost burdens associated with disbursements, is sufficient liquidity. If costs exceed revenues, then the only way to make up the difference is through loan financing. Banks will be willing to provide financing if they see clear prospects. When markets are volatile, they tend to operate cautiously. Equity to debt ratios will deteriorate, and the interest burden will rise.

In principle, credit management should monitor very closely companies whose ratings were not good even before the Ukraine war and whose liquidity situation was also tight. Likewise, companies in sectors with energy-intensive production should be monitored more closely. If production losses occur in these sectors, e.g., for intermediate products, then the companies affected in the value chain should be analyzed.

This involves simulation calculations based on annual financial statements and close observation of the companies' own payment experiences. If possible, external payment experiences should be considered. A well-structured credit management will master this and can effectively support sales. Likewise, to secure good sales.


Allgemein 4

Questions?

You want to know more about this topic or how we can support you? Please contact us!