Strengths of small to medium-sized companies in Germany and the consequences for the financial management

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German medium-sized companies are seen as the backbone of the German economy. Previously many small to medium-sized companies in Germany were not open to the option of financing through the capital market or an investor. As a result of international investments, the financing behaviour is now changing significantly.
 
 

The high economic importance of small and medium-sized companies in Germany

In terms of its gross domestic product, Germany is the largest economy in Europe. The established success has awakened curiosity of well-known foreign investors who are interested in shareholdings in or acquiring German companies. The interesting point here is that according to the institute for research into medium-sized companies 99.6 percent of all German companies with sales from products and services and/or with employees subject to social contributions are small or medium sized companies. This characteristic which is typical for the German economy is a particularly relevant aspect of why the German economy is so successful compared to other European economies.
 

Productivity of German small and medium-sized companies

German small and medium-sized companies are characterised by a considerable resistance to crises in spite of less favourable general conditions compared to large groups. Despite the recent years of crisis, the employee numbers at German small and medium-sized companies have on average risen. In addition, during the economic collapse in 2008 and 2009 they were considerably less affected. According to a survey by the German institute for research into medium-sized companies (IfM), in contrast to this large groups in this period reduced their average employment rate.

 

A further strength which allows German small and medium-sized companies to set themselves apart from large groups is the excellent flexibility in relation to customers and the market. These companies are able to implement production more quickly because they produce smaller batches. They are therefore able to fulfil special customer requirements. This strength will remain in future and continue to influence the German economy.

 

In addition, it should be mentioned that the way German small and medium-sized companies manage their personnel also enables the employees to achieve high productivity. In this context the scope of activities of the employees is characterised by job enrichment, job enlargement and participation which considerably helps to avoid monotonous work. Whereas larger groups tend to be engaged in bureaucratic standardisation and regulation due to the complexity of their organisation, the small and medium-sized companies due to their smaller degree of differentiation are able to offer better arrangements in relation to the workplaces. This avoidance of monotonous work leads to higher motivation and therefore increases the productivity of the human resources.

 

Financing methods used by German small and medium-sized companies

The current financing behaviour of the small and medium-sized companies ranges from standard financing instruments including internal financing, bank loans and partner contributions or loans. The financing instruments of an initial public offering  and capital market oriented external financing have the lowest priority for these companies. One of the main reasons for this is the incorrect assumption of most of the affected companies that they due to their size are not ready for the capital market. Positive experience, however, indicates that financing via the capital market for small and medium-sized companies is a practical possibility. As far as this is actually possible, the use of this financing alternative which has up to now remained undiscovered means that the small and medium-sized companies can further improve.
 

Consequences for the financial management at German small and medium-sized companies

Due to the mentioned special conditions which are to be found in these companies an adequate organisation of the financial management to take these conditions into account is essential. The appropriate corporate planning is important here. In order to maintain and improve the mentioned flexibility with regard to customers and the market and the mentioned resistance to crisis, the quantitative area of the planning of costs, investments and liquidity is of particular significance.
 
The cost management of small and medium-sized companies must firstly ensure that using a transparent cost structure the fixed costs are recognised and reduced as far as possible. This flexible approach regarding the total costs can be used to counter a decrease in sales through an immediate reduction in costs which in turn increases the mentioned resistance to crises.
 
Consistent investment planning is essential for the maintenance of the described flexibility which characterizes German small and medium-sized companies. In order to be quickly able to react to changes in demand, the company always has to be able to finance new acquisitions. When the company does not integrate this flexibility which is strategically necessary to achieve success in its company planning, in the long-term the company will lose its strength and finally fail.
 
The liquidity planning has to enable adequate working capital management in order to ensure the continued solvency of the company.
 
In addition, complete clarification of all financing alternatives including opportunities and risks is necessary to enable the lowest possible financing interest.
 

Conclusion

The German economy which is one of the most successful economies in Europe is characterised by small to medium-sized companies. German small to medium-sized companies are especially resistant to crises and are particularly flexible in dealing with changes in demand. In order for these companies to retain their potential for success, it is essential that the financial management sufficiently takes these strengths into account.
 
The financing instruments of an initial public offering and capital market oriented third-party financing due to incorrect conclusions are noticeably less significant for German small to medium sized companies. In this respect the financial management must have the necessary expertise and also determination to use the capital market oriented sources of financing in order to enable the procurement of capital for the lowest cost.
 

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Isabelle Pernegger

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Gökhan Aslan

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+49 911 9193 3359

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