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How to spot if clients are at risk of insolvency

It’s a difficult scenario – you are firmly entrenched in a supply chain perhaps and your clients are the feed for this chain. To lose any of them could cause untold damage – particularly if they owe you money.

And it’s not even something you can discuss openly because there is a real danger of being held accountable in defamation law if you (even inadvertently) spread rumours which bring into question a company’s solvency.

So how are you supposed to know if a business that you deal with on a day-to-day basis is running into financial difficulty or teetering on the verge of insolvency?

At Wilson Field, we are well versed in spotting the signs which indicate businesses in distress and then acting to help those companies out of trouble before it is too late, so here are a few of the warning signs that may help you to identify if your clients may be starting to suffer cash flow problems.

Are you seeing an extending payment period for your services or goods? This is often a warning sign that cash flow is tight – and although it may simply be a temporary development, it’s worth taking note if you witness a lengthening payment period, particularly if it is combined with other factors. It can creep up unawares as you focus on the other areas of your business, you may not notice that a client or customer has stretched 60 day payment terms out to 75 days and then on to 90 days – especially if you invoice multiples of clients.

Check at Companies House and see if the client has entered a late filing period for its annual accounts. It is free to do this and allows you to spot other anomalies such as changes to officers (directors etc). Late filing of accounts sometimes happens when a company has something to hide, such as posting a significant loss. Equally worrying, they may simply be disorganised and that will likely reflect other aspects of how the business is managed.

Sometimes, late accounts can be followed by a Companies House threat of ‘strike-off’ from the register of companies. This will be a direct result of a company pushing well beyond the allocated filing period, but crucially, the two factors can be a strong indicator of a company in difficulty. Once this information is in the public domain, it can result in other creditors curtailing credit and suddenly cash flow can come under spiralling downward pressure.

And despite the fact that prosecution is a real threat for those who carelessly spread rumours about a company’s stability, rumours do occur and if they are rife, there may be some truth – especially if people are saying that they are experiencing the same difficulties as you in getting payments etc. You may also hear other rumours such as bounced cheques which are bad signs.

It may come to your notice that your client has been issued a County Court Judgement (CCJ) for non-payment. This is another strong indicator of troubled waters.

Are you seeing changes in the client’s business? There are often abrupt changes in management, reductions in fleet numbers, redundancies, staff departures etc which can be indicative of a business changing for the better, but which are more often indicative of a struggling business.

Have you seen your customer placing smaller and more frequent orders? This can be an indicator that there is insufficient cash-flow for them to stock the shelves fully, so they are placing orders as and when they can afford to.

And the next question, if you should you spot a combination of the above factors and decide to take action, is what should you do about it?
At this stage, you will be genuinely concerned that your client or customer is suffering some form of financial difficulty and it becomes crucial that you take steps to protect your own business from the potential fall-out from an insolvency in your supply chain.

Although it may seem a bit late in the day for you to consider it, a good practice to minimise bad debt risk for your company, is to undertake credit checks on those who pay you for your goods or services.

These credit checks should be undertaken before allowing credit ideally, as they may show clear evidence of a business which does not honour its credit arrangements.

And it pays to run credit checks periodically for ongoing customers. This becomes much more of an imperative if you spot warning signs that your client is suffering cash-flow problems.

If you are armed with credit check information about a customer, you should approach them to arrange an agreed credit limit and you should stick to that limit.

Where credit arrangements already exist and you already have concerns about your client, your policy should be to collect all monies owed to your business promptly and to remain inflexible in this approach.

If you find that you are overdue on payments from a client or customer – step in and work hard to recover the funds as quickly as possible. Familiarise yourself with the accounts payment department and chase your debt diligently. In tight situations, struggling businesses may simply hold payments – only paying those who hound them for the money so it’s important that you are heard as much as the next person. Don’t be caught out simply because you didn’t shout loud enough! This is a crucial part of any business so if you or your company are not good at collecting money due to you, consider outsourcing the job to specialists.

The situation is a difficult one because you will not want to alienate customers by taking a hard line with them unnecessarily, but remember that your own livelihood may be at risk if you do not take fast action to protect it from unpaid debts. If your client does become insolvent – recovering money owed to you may be much more difficult and may even be an impossibility, leaving you in your own financial danger.

Wilson Field works to help businesses in all kinds of financial difficulty and we can advise on how to handle situations which may place your business at risk of insolvency. In all instances, it is best to seek professional advice as soon as you are alerted to a problem. So pick up the phone – we’re here to help.

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