Early Crisis Detection

What is early crisis detection?

Early crisis detection (German Krisenfrüherkennung) denotes the continuous monitoring of a company for developments that could endanger its continued existence, combined with the duty to take countermeasures when dangers are identified. Identified dangers must be reported to the supervisory bodies such as the supervisory board or advisory board. For the managing directors of legal entities, such as the management of a GmbH (German limited liability company), this duty has been expressly regulated since 1 January 2021. It is set out in Section 1 of the German Act on the Stabilisation and Restructuring Framework for Businesses (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG) under the heading “Early crisis detection and crisis management at entities with limited liability”. The instruments with which a company identifies such developments are called an early warning system or early crisis detection system in practice. The English term is early crisis detection.

Before a high-altitude mountain tour, mountain guides set a turnaround time and continuously check weather and pace along the way. When the time is reached, the group turns back, even if the summit seems close. An early warning system works in the same way, with thresholds set in advance at which action is taken and reports are made.

The duty applies to the management of the GmbH and the management board of the AG (German stock corporation). For partnerships without a natural person as personally liable partner, it applies correspondingly to the managing directors of the managing partner, in the typical GmbH & Co. KG (a limited partnership whose general partner is a GmbH) therefore to the management of the general partner GmbH (Section 1(2) StaRUG). The addressees of the reports are the supervisory board or advisory board with a supervisory task, and where there are no such bodies, according to the prevailing view, the shareholders' meeting. In practice, early crisis detection takes effect long before any proximity to insolvency, for example around the time of a financing. The managing directors' duty has nothing to do with the early crisis detection of the same name in security policy, which observes international crises and conflicts.

Legal framework

The duty under Section 1 StaRUG

Under Section 1(1) StaRUG, the members of the managing body continuously monitor developments that could endanger the continued existence of the legal entity. If they identify such developments, they take suitable countermeasures and report without undue delay to the bodies responsible for supervision. If the measures affect the competence of other bodies, for example in a capital increase, they work without undue delay towards those bodies dealing with the matter. The law prescribes no form; the scope depends on size, business model and risk situation.

Stock corporation, advisers and liability

For the management board of an AG, Section 91(2) of the German Stock Corporation Act (AktG) additionally requires a monitoring system so that developments endangering the company's continued existence are identified early. For listed companies, an appropriate and effective internal control system and risk management system is added under Section 91(3) AktG. Tax advisers, auditors, lawyers and other professionals who prepare annual financial statements must, under Section 102 StaRUG, point out a possible ground for insolvency. This applies where indications are obvious and they must assume that the client is not aware of the possible insolvency.

Managing directors who neglect the monitoring are liable to the company for the resulting damage (Section 43(2) of the German Limited Liability Companies Act, GmbHG), members of the management board under Section 93(2) AktG. The insolvency petition must be filed without culpable delay, at the latest three weeks after the onset of illiquidity (Zahlungsunfähigkeit) and six weeks after the onset of over-indebtedness (Überschuldung) (Section 15a of the German Insolvency Code, InsO). From the onset of insolvency in the legal sense (Insolvenzreife), that is, from illiquidity or over-indebtedness, payments are in principle prohibited; payments made in breach of the prohibition must be reimbursed by management (Section 15b InsO).

Forecast horizons: 12 and 24 months

Illiquidity (Section 17 InsO) describes a present state: the company can no longer pay its due invoices. Imminent illiquidity exists if the company will presumably be unable to meet existing payment obligations when they fall due. As a rule, a forecast period of 24 months is to be applied (Section 18(2) InsO). Imminent illiquidity establishes a right to file, not a duty to file, and opens access to the restructuring framework of the StaRUG, a court-supervised restructuring without insolvency proceedings.

Over-indebtedness exists when assets no longer cover existing liabilities, unless continuation is predominantly likely over the next twelve months (Section 19(2) InsO). The liquidity planning of an early warning system should therefore cover at least twelve, better 24 months. The standards of these tests are explained in the entry on liquidity.

Instruments of an early crisis detection system

• Rolling liquidity planning: short term in weeks, commonly over 13 weeks, thereafter in months to the end of the forecast period (liquidity planning).
• Budget vs actual comparison: deviations that run in the same direction over several months are often the first reliable indication (budget vs actual).
• Leading indicators: variables that move before revenue and earnings, such as order intake, sales pipeline, customer churn, receivables days and use of credit lines.
• Thresholds: limits set in advance, such as a liquidity runway in months or the distance to the financial ratios in loan agreements (covenants).
• Escalation rules and documentation: who informs whom at which threshold, and retained planning versions and reports as later evidence.

Early crisis detection before a funding round and in due diligence

For growth companies that finance losses from equity, runway, the number of months for which the liquid funds still last, is the most important leading indicator. If continuation depends on follow-on financing, the planning shows what happens in the event of delay or a smaller volume, for example cost measures or bridge financing by existing shareholders (bridge financing).

The due diligence, the detailed review before signing a contract, also covers the topic. Investors and buyers check whether an early warning system exists, whether the advisory board was informed in good time and whether there were phases in which a ground for insolvency may have existed. Such phases can give rise to liability risks and are dealt with in the contract, for example through warranties.

Worked example: threshold for the liquidity runway

A software company has EUR 3,000,000 of liquidity at the beginning of January with a planned monthly cash outflow of EUR 200,000. This is the amount by which the liquid funds fall each month after deducting customer payments. Management has determined that the advisory board is to be informed as soon as the runway falls below ten months.

• Runway according to plan in January: 3,000,000 divided by 200,000 = 15 months.
• Actual January to March: revenue falls short of plan, the cash outflow is EUR 250,000 per month. Liquidity at the end of March: 3,000,000 minus 3 × 250,000 = EUR 2,250,000.
• New runway at unchanged cash outflow: 2,250,000 divided by 250,000 = 9 months. The threshold has been breached.
• Countermeasure: hiring freeze and cost reductions of EUR 40,000 per month. Runway afterwards: 2,250,000 divided by 210,000 = around 10.7 months.

Management reports to the advisory board, resolves the cost measures and brings forward the start of the financing process. Because the funds last neither twelve nor 24 months without new financing, the going-concern forecast and the assessment of imminent illiquidity depend on how likely the follow-on financing is. This assessment and the alternatives prepared are documented.

Distinctions: early crisis detection, risk management and controlling

• Risk management: covers all material risks, including those that do not threaten the company's existence. Early crisis detection is the part of it that Section 1 StaRUG prescribes for all entities with limited liability.
• Controlling: ongoing planning and steering, whose instruments the early warning system supplements with thresholds and escalation rules.
• Forecast: the continuous projection against whose figures the thresholds are measured.

Common mistakes

• Monitoring without documentation. If planning versions and reports are not retained, it cannot later be proved that the duty was fulfilled.
• Horizon too short. Planning up to the end of the financial year covers neither the twelve months of the going-concern forecast nor the 24 months of imminent illiquidity.
• Report to the advisory board postponed. Withholding the report until financing is secured contradicts the duty of prompt notification.
• Follow-on financing assumed to be certain. Planning that only works with the next round needs documented assumptions about its likelihood and a plan for the event of delay.

Frequently asked questions

Does the duty of early crisis detection also apply to small GmbHs?

Yes. Section 1 StaRUG does not distinguish by size, but the effort adapts. For a small GmbH, well-maintained liquidity planning with a monthly reconciliation may be sufficient.

To whom does management report if there is no advisory board?

According to the prevailing view, to the shareholders' meeting. Under Section 46 No. 6 GmbHG, it is responsible for the review and supervision of management.

Is a financing gap in the planning already a ground for insolvency?

No. A future gap may indicate imminent illiquidity, which entitles but does not oblige to file a petition. It does, however, require countermeasures and a report to the supervisory bodies.

What does IDW S 16 provide on early crisis detection?

The standard of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer, IDW) describes how early crisis detection and crisis management under Section 1 StaRUG can be designed. The final version was published in November 2025. It is not legally binding but shapes the practice of auditors and advisers. According to it, the basis of the system is integrated planning of earnings, balance sheet and liquidity.

Is the tax adviser liable if the adviser does not point out a crisis?

This is possible if the adviser breaches the duty to give notice under Section 102 StaRUG. The responsibility of management is not removed as a result.

The Roemer Capital view

The liquidity runway is the first figure Roemer Capital checks in a new funding mandate. If it is below twelve months at the start of the process, the lower end of the guideline figure of 12 to 18 months, the process comes under time pressure, and investors notice this. Roemer Capital then clarifies with management and shareholders first how the gap is to be bridged, and only afterwards when the first investor meetings begin.

In its CFO mandates, Roemer Capital sets up rolling liquidity planning with fixed thresholds and reporting lines to the advisory board. The assessment under insolvency law belongs to the company's law firm and tax adviser; Roemer Capital's contribution is planning on which this assessment can be based.