SPOTTING THE DANGER SIGNS
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Simple steps to help sidestep dodgy customers
How to spot a customer going bust...
before it happens
Words: Andrea Kirby
Learning to spot the signs that a customer might be going under can help prevent your company being dragged down too
It's happened before and it will happen again: a big irm goes bust and half its suppliers go bust the week
after. And when you ask around, very often, everyone could see the signs, but they’d made excuses, or thought they were the only people being paid late.
Ideally, you should not commit more than a ifth of your business to any one customer; you should have more, smaller customers rather than a single big one. However, for many small businesses that started out with a single contract, that isn’t practical right now. Trying to balance the business by gaining other contracts is a long-term solution and could take three or four years. Even though having one customer accounting for 10% of the business, might not bankrupt you, it can still make a nasty dent in the irm’s proits for the year if that customer collapses.
A business in this position needs to keep careful track of key customer accounts and that means not just making sales, but making sure invoices are paid. If you’re running your working capital tightly, your accounting system should give you advance warning. If the average days credit on a customer’s account keep getting longer, that’s a bad sign. It could mean the customer just got a new inance director who decided to run the working capital a bit more proactively, but it could also mean the customer is in trouble, and paying late because they can’t pay on time. If a trend towards later payment (not necessarily late payment – just later than before) becomes established over a number of months, it’s time for the inance department to make a few enquiries. Another danger signal is a change in regular payment dates to later in the month.
Get the accounts
Make sure you get a copy of the report and accounts for all major customers. If they’re quoted companies, it will be easy. If not, then it is worth getting them from Companies House. Any accountant can see from the numbers – particularly the borrowings, and the relationship between sales igures and the amount of stock and debtors – whether a irm is in trouble. Of course all annual reports are out of date as soon as they’re published, although less so than used to be the case in the past, but really late iling of accounts is a bad sign in itself.
Often, when a customer goes bust, suppliers remember that a couple of cheques had bounced, or a couple of invoices had got ‘lost in the post’. Well, accidents do happen, and just occasionally even a well run and proitable business has a squeeze on cashfiow, so you might be tempted to give them the beneit of the doubt. But these things don’t usually happen that often; two ‘lost’ invoices in two months is almost always a sign of a company trying to stretch its inances a little bit too far.
It’s surprising that suppliers don’t talk to each other more. If you’re experiencing payment problems, then check it out with other suppliers you know (a good reason for having a network of friends in the industry). Have they experienced the same problems? Very often, in the case of a customer with trouble, all the suppliers are having the same dificulties.
A further sign of dificulty in any company is high staff turnover, particularly in the accounts department. This might relect staff not getting paid, or more likely staff who ind claiming expenses has become a nightmare, or basic necessities are not being provided, or – in the accounts department – staff who are just fed up with dealing with the question: “When are we going to be paid?” Managers and directors leaving is a particularly bad sign.
Check the marketing
Finally, it makes sense to know how your customer is doing by keeping an eye on its marketing behaviour. For instance, if a customer is known to be discounting heavily to get business, and yet its business isn’t growing, then that might well indicate it’s having trouble.
So, if you think a major customer is in trouble, what next? First of all, put the account on to an emergency basis. Know what you’re spending on that customer account, and what that customer owes you, on a daily basis. That’s the amount you stand to lose, in real money terms, if the customer goes under. Ensure that the account is managed actively: payments need to be chased.
Second, if the level of risk is unacceptable, you need to talk to the customer – urgently. The most important priority is to ensure that your cash costs are covered. If you are incurring costs on behalf of the customer, which you then recover on a regular basis – for instance, materials provided on a project – you are extremely exposed. If you have experienced a number of late payments, you should ask for these costs to be paid in advance, if possible completely, but at least partly. That will reduce your exposure. If the customer goes under, you will lose any future business that might have come from them, but you should aim not to lose money you have basically lent to them.
You might also wish to negotiate new terms. For instance, some utility irms expect retail customers with poor payment records to pay in advance through keycards. That works in business too. On projects, the timing of stage payments may be changed. Late payment of previous charges is likely to be considered a breach of contract, so the original contract can be rewritten. You will need to ask your solicitors for advice, but just mentioning breach of contract might get the response you want from the customer. For ongoing accounts, you might reduce payment terms.
Finally, you might decide to cut off the customer. Most irms won’t do this because they know if they do, they will have to make redundancies and the business will have to exist on a lower level of turnover. That’s tough. If you really believe the customer is going to go under, the question is whether you will let it go under owing you money. The redundancies will have to be made anyway, but at least you might not have to write off your receivables or stock.
The decision to cut loose is, in the end, your best negotiating counter. A problem customer with any hope of continuing in business will not want to prejudice its chances. Finding another source of supply could be dificult if its credit rating is poor, and any publicity about the problem will sink it. On the other hand, if your customer has no chance, you might as well ind out sooner rather than later. ■