Insolvency in Practice: What Founders and Finance Teams Need to Know

In 2025, Germany recorded just under 23,900 corporate insolvencies (Source: Destatis, 2026). This is the highest level in over ten years. Bad debt losses totaled 57 billion euros. The figures show that insolvency is no longer a marginal issue, but a real risk for startups, scaleups, and their finance teams.

Note: In this post, we summarize key insights from an episode of the torq.partners Finance Podcast. Alina Nauen speaks with Jana Tonn, a consultant at torq.partners who has guided several companies through full insolvency proceedings. Jana shares insights from her practical experience and explains what really matters in a crisis situation.

Recognizing Early Warning Signs: When a Crisis Becomes Apparent

Insolvencies rarely happen overnight. In practice, the first signs almost always show up in the cash flow: the account balance drops, the runway shortens, and payment terms are exceeded. At the same time, the company’s management shifts from being proactive to purely reactive. Working capital also provides early warnings. When receivables rise and aren’t collected, or when capital is tied up in inventory at manufacturing companies, pressure on liquidity increases.

KPIs that serve as early warning indicators include the cash burn rate and the resulting runway, DSO (Days Sales Outstanding) as an indicator of the speed of receivables collection, margin trends and revenue declines on the income statement, as well as rising churn rates on the customer side. When the runway is measured in weeks rather than months, the room for maneuver is already severely limited.

A key problem during a crisis is a forecast that doesn’t match reality. The causes are often the same: inconsistent, incomplete, or outdated data; overly optimistic assumptions; and a model that cannot capture the complexity of the business model. Especially in the startup environment, wishful thinking often creeps into planning. The most important countermeasure: continuously reconcile the forecast with actual results, base it on realistic assumptions, and consistently run through worst-case scenarios. In such a situation, professional financial planning is not a luxury but a necessity.

Insolvency and Over-Indebtedness: What Insolvency Law Requires

Insolvency law distinguishes between two key scenarios. In the case of insolvency, the forecast period is three weeks: If the company cannot meet its due obligations with its available cash and liquid assets within this period, it is required to file for insolvency. Over-indebtedness refers to a period of twelve months and considers the overall balance sheet structure. Here, an assessment is made as to whether the company’s assets—that is, current assets including receivables and, where applicable, fixed assets—are sufficient to cover its upcoming liabilities.

In the startup environment, with its dynamic cash flows, it is not always possible to assess insolvency on a day-to-day basis. This makes clear reporting and sound financial management all the more important for being able to assess one’s own financial position at any time.

For founders, the issue of liability is particularly relevant at this stage. The greatest risk is losing too much time. Anyone who fails to comply with the obligation to file for insolvency can quickly find themselves in violation of the law against delaying insolvency proceedings, which is subject to criminal investigation. Filing for insolvency is typically accompanied by a notification to the public prosecutor’s office. The clear recommendation: it’s better to seek legal and financial advice too early than too late.

Prioritize Payments and Secure Cash

If liquidity is no longer sufficient to cover all liabilities, clear prioritization is required. Wages and salaries, social security contributions, and taxes take priority. Failure to pay these carries a direct risk of penalties. Next come operationally critical costs: electricity, rent, key suppliers, and—depending on the business model—marketing expenses. Financing and loan obligations are considered in the next step, as banks often play a strategic role in securing liquidity. Everything beyond that is evaluated based on strategic value.

At the same time, it’s worth actively negotiating with suppliers. Extended payment terms or deferral agreements can extend the runway in the short term and avert impending insolvency.

There is often untapped potential on the receivables side, as it frequently becomes apparent in practice that there is no structured dunning process in place. Consistently adhering to your own payment terms, actively collecting outstanding receivables, and—where appropriate—offering discounts for prompt payment are strategies that can have an immediate impact.

Communication and Cooperation in Insolvency Proceedings

Once insolvency proceedings have been initiated, various groups must be informed: banks as liquidity providers, employees, suppliers, and—depending on the stage of the proceedings—customers as well. For employees, the rule is: as early as possible, as transparently as necessary. Communication must be clear and reliable, because nothing undermines trust within the team faster than contradictory statements. Clear communication from management is crucial, not least so that the finance team—which often has to maintain direct contact with suppliers during this phase—can continue to function effectively.

The type of proceeding determines the extent of cooperation with the insolvency administrator. In a standard insolvency proceeding, authority lies largely with the administrator, and payment plans and approvals are closely coordinated. In self-administration, significantly more authority remains with the company. This model is more focused on guiding the company through the situation so that it emerges stronger, whereas standard insolvency proceedings may, in some cases, also involve liquidation.

What the Finance Team Must Do During the Crisis

During an insolvency phase, the finance team becomes the linchpin. Accounting records must be up-to-date and complete, because cash management and all operational decisions are based on them. Reporting often reveals that previous reports were overly bloated. The crisis forces a focus on the KPIs that are truly relevant for management. Visual aids such as traffic-light systems or heat maps help provide management and the insolvency administrator with quick guidance.

Cost control must also be consistently enforced, for example, by requiring purchase approvals up to the management level and clearly communicating to the team which expenses currently take priority.

After Bankruptcy: Clean Up and Secure Your Assets

Once the process is complete, the cleanup phase begins. For the Finance Team, this means: reviewing receivables and writing them off on a pro-rata basis where necessary, continuing to closely manage cash and liquidity, adjusting cost structures and budgets to the changed situation, and consistently maintaining the reporting practices that were refined during the crisis.

From an accounting perspective, insolvency results in up to three short fiscal years: the period beginning with the opening of proceedings, the intervening period, and the end of the insolvency. These phases must be clearly delineated, and the tax authority typically assigns a new tax identification number for the insolvency period. In the annual financial statements, the going-concern assumption must be clearly stated, and the insolvency events must be documented in the notes to the financial statements.

The most common mistake after bankruptcy: falling back into old patterns and failing to apply the lessons learned from the crisis. Companies that have succeeded stand out because they have consistently refined their business model and shifted their focus from growth to sustainable stability.

What Would Have Prevented Many Bankruptcies in the Past

Insolvencies do not happen overnight. They are the result of a process that becomes apparent early on if the right tools are in place. These include a robust forecast, professional cash management, effective financial control, and a functioning risk management system.

Three recommendations for CFOs and finance teams: Know your company’s cash position at all times and ensure transparency regarding it. Make decisions consistently based on data. And don’t view insolvency as a failure, but rather as a tool that can help get a company back on track.

Here's how torq.partners provides support

Corporate crises often hit the finance function first. Whether it’s a matter of securing liquidity, delivering robust reporting under time pressure, or handling the aftermath of a legal proceeding, the finance team needs structures it can rely on during these phases. torq.partners supports startups and companies as an interim CFO and through interim accounting services in establishing and stabilizing financial processes—from cash management and forecasting to reporting and monthly closings.