Liquidity management in mechanical and plant engineering – the challenges are rising again!

“Short-time work in the mechanical and plant engineering sector in the Corona crisis – fully exploit the potential now” was the headline of a news item in this section about a year ago.

The cabinet has just extended relief rules for short-time working until March. However, disruptions to supply chains have added further challenges for the industry. Further challenges that affect production planning and control on the one hand, but also to a considerable extent liquidity management.

Here, even more intensive management will be even more essential and challenging for many companies than during the previous crisis.

Indeed, in the first waves of the pandemic, uncertainty about further economic developments led to considerable reluctance to invest and thus to holes in demand in the industry’s order books. While at times there were strong signs of a significant recovery, the fourth wave has once again dampened earnings expectations, at least in some areas. In addition, the new virus variant Omikron is causing further uncertainty. Above all these effects led to the cabinet decision on November 24, 2021 to extend the short-time working regulations until March 31, 2022 – with a reduction in the assumption of social security contributions from 100% to 50%. In addition, there are also plans to continue the tried-and-tested bridging assistance until March 31, 2022.

In previous waves, the combination of both measures has helped many companies significantly to cushion challenges posed by the crisis, at least on the earnings side.

On the liquidity side, effects on companies remained limited at first in many cases.

To be sure, the support measures often resulted in delays. However, these gaps were often offset by negative prefinancing effects, i.e. lower funds tied up in declining output. As the investment brakes were eased during 2021, funding needs then turned to a return to areas of previous prefunding needs.

But then, for a variety of reasons, supply chain disruptions also built up over the course of 2021.

For the plant and mechanical engineering sector, these disruptions have an even more serious impact:

Complex products are often based on comprehensive parts lists. Every single missing part can then delay the entire production – missing microchips in the automotive industry are just one particularly striking example.

[Source: adapted from NZZ] 

Delayed deliveries result in delayed cash-ins, while suppliers want to be paid for non-delayed deliveries.

Good workloads and delayed deliveries increase funds tied up in work-in-process inventory to above-average levels for which financing is sometimes not designed. While support measures have often compensated for the negative liquidity effects of underutilization and low output, recent low earnings may mean that there is not enough liquidity to finance current above-average inventory levels.

The impact was and is evident at a plant engineering company that manufactured components and modules for large plants:

  • At the beginning of the pandemic, the order books were so well filled that project financing lines and working capital credit lines were not only fully utilized, but there were requirements beyond that. Banks therefore demanded a medium-term liquidity plan covering a period of 30 months. However, the existing project planning for orders on hand and receipts did not cover enough time to enable a medium-term liquidity plan that realistically reflected the business model to be drawn up.
  • To solve this problem, HC was tasked with planning that would also take into account projects with funding requirements and project financing. HC addressed the requirement to take into account projects of the order intake that had not yet been finalized by planning sample projects that were planned individually in an integrated manner. This made it possible to synchronize funding requirements and financing in terms of planning.
  • In order to better manage liquidity at an operational level**, a short-term 13-week liquidity plan was set up in parallel, which took into account open accounts receivable and payable, planned sales and material purchases not yet invoiced, other costs, incoming payments and outgoing payments, as well as value dates and repayments of project financing. This planning was updated on a weekly basis.
  • Starting fall 2020, the investment blockade then began to impact the company’s order books. The subsequently updated planning initially showed significant shortfalls. Accordingly, the skepticism that had existed until then about making extensive use of short-time work decreased. In addition, the development moved the company into the area of bridging assistance. Planned calculations made it possible to submit applications in good time. These measures made it possible to avoid the initially threatened shortfall in coverage.
  • Accordingly, 2021 was still characterized by an acceptable result and relatively high free lines in terms of liquidity, despite low output.
  • As is typical for the sector, recoveries in demand only had a delayed impact from the fourth quarter of 2021, but were met with delivery problems. Inventories of work in progress increased accordingly. However, it was possible to identify corresponding tensions in liquidity in good time from the 13-week plans. It was therefore possible to enter into negotiations with suppliers in good time to extend payment terms depending on delivery possibilities.


The case shows that companies in the mechanical and plant engineering sector face major challenges in terms of liquidity management. These challenges, which were already high, were further intensified in the Corona crisis and its aftermath. It is therefore important to have the necessary instruments in place in good time in order to be able to react promptly to changes. In this example, the tools provided by HC allowed timely reactions in each case.

More challenges await… 

On the subject of liquidity and inventory management, the HANSE Consulting experts
Dr. Thomas Zubke-von Thünen and Dr. Armin Bratz will be happy to assist you.