This is the last thing your business needs in these difficult economic times.You must do everything to minimise risk to your business.
Monitoring the financial health of your customers is one way to do this. This way, if you spot a customer in trouble you can take steps to avoid or mitigate the damage to your own business.
But what if there was a way to avoid financially risky businesses ever becoming customers?
Wouldn’t this make your business more efficient and robust?
In this article, we’re going to explain how you can do this. We’ll also explain how to find financially sound suppliers.
First, let’s take a look at why working with customers that pose a high financial risk is dangerous for your business.
We’ve already mentioned how losing a customer not only hits your revenue but can also leave you with unpaid invoices.
Most businesses never get the money from these invoices back and have to absorb the loss as bad debt.
This happens a lot. Every year the UK economy loses billions of pounds to bad debt.
Worse still, our research shows that the number of insolvencies is set to spike over the next 18 months.
Monitoring the financial health of your customers helps protect your business against losing customers and experiencing bad debt.
Many businesses understand this and conduct credit checks at the customer onboarding stage.
Credit checking your customers at the onboarding phase is a great start, but it’s still inefficient.
Your sales and marketing teams put a lot of effort into winning a customer’s business.Other teams may have also been involved. For example, your legal team may have to conduct regulatory checks.
This time is wasted if the customer then fails to pass a credit check. It’s also a waste of time for the customer and leaves them with a bad impression of your company.
Depending on the criteria for onboarding companies, 35% or more of your target market may not pass this process.
The solution is to ensure that you only approach customers that are financially robust.
To do this, you need to integrate credit checks into your prospecting process.
Integrating credit checks into prospecting begins with your ideal customer profile.
An ideal customer profile is a representation of the kind of customer you want to work with. It is created using data to analyse the characteristics of your real-world customers.
A customer profile gives you insight into factors that affect a client’s relationship with your company. For example, their buying habits, needs and preferences.
Most companies build their customer profiles around factors such as buyer intent or whether they need your product or service.
This helps drive sales, but it doesn’t determine whether the clients they target will be financially robust.
Sales teams should include creditworthiness as part of their ideal customer profiles.
This way, they can easily discount any clients that pose too much risk at the prospecting phase as spending money trying to win these is going to lead to a negative ROI in the long run.
So how can you tell if a client is creditworthy? In this section, we’ll explain some of the financial health indicators that could help you decide. These factors can be built into your ideal customer profile.
Consider how the value of a company’s assets has changed compared to its liabilities in recent years and use this to guide your decision-making.
Have they suffered bad debt?
Companies that experience bad debt are three times more likely to fail. The level of risk is variable and needs to be viewed in the context of the company. The size of the bad debt relative to the company’s net worth will give abetter indication of the effect.
Changes in accounting periods
Overdue accounts or changes to filing periods are common features amongst failed companies. It may suggest poor management, or it could be an attempt to hide financial difficulties.
The value of company assets
If the value of the business’s assets drops below that of its liabilities then it is technically insolvent.
When businesses are liquidated their assets are sold to pay off creditors. If the value of assets is less than the liabilities there will not be enough money left to repay creditors.
The company’s liquidity
Companies with poor liquidity constantly plug holes in their cash flow, which is expensive, time consuming, and often leads to a slow decline. What an acceptable level of liquidity looks like depends on the company’s sector.
The key question is: are you comfortable that it can survive a problem with cash flow, such as a downturn in revenues?
Not enough emergency funds
Any company should have funds available to cover it during challenging times. If the business is out of cash, asset-poor and has no emergency funds to fall back on, it is left to depend on emergency borrowing to survive. This makes it more prone to a financial shock.
Legal action
If a company fails to repay creditors it could result in them issuing a statutory demand, county court judgement (CCJ) or winding up petition (WUP) to recoup the money. If the court grants a winding up order against a business, this could result in compulsory liquidation.
Don’t count stock valuation
Stock makes up an important proportion of some companies’ assets. The problem is that there is a degree of subjectivity around what the stock will sell for.
For example, a business may report a stock value of £3m but hold aware house full of jeans that have gone out of fashion and will sell for£400,000 or less.
It is good practice to consider the company’s financial health with stock removed.
Customers aren’t the only risk factor facing your business.Losing a supplier can be devastating for your business.It can cause a funding gap, increase your expenses and even stop you from delivering work or products.
Here’s a quick overview of how to ensure you choose robust suppliers:
Are they legitimate?
If the business is a limited company based in the UK, you can visit the Companies House website to confirm details such as its address and registration. You can also download its latest accounts.
Alternatively, if the company is a VAT registered supplier based in Europe you can see its VAT numbers on the VIES website.
Define terms of business
Define your terms of business before entering into a contract to ensure you and the supplier know what is expected of each other. This will reduce the chance of conflict later. Make sure you understand how the supplier deals with payments, delivery, returns, or anything else that is important to the success of the deal.
Get references
Speak to a supplier’s existing or past customers to find out how the company operates. Ask questions to understand what it is like to work with the company.
You can find out more by checking social media pages, review websites, or Google Business listings.
Research company directors
Visit the Companies House website and take a look at the supplier’s director records. If there are recent changes you could ask why this is and how it will affect the business.
Try Googling the name of the director to find information about their past successes or failures. This could influence your decision to work with the company.
Request samples
Where appropriate, a good way to see the service and the product a supplier offers is to request samples. This will show the quality you can expect from the finished product and give you a glimpse into how the business works.
If you are happy with the sample, you could set contract terms to ensure the product doesn’t deviate from the supplied sample.
Assess the proposal
The quality of the supplier’s proposal hints at how they will treat you as a customer. It’s a good sign if the proposal is tailored to your needs and shows how the product can benefit your business.
This suggests that they will work with you to resolve any issues that may arise once you begin working together.
Check the company’s financial health
Finally, you should check the supplier’s financial health in the same way you would a customer.
This is critical if you plan to rely on a single supplier to power much of your business.Any problems could be a huge issue.
Building credit checks into your prospecting will help you avoid working with companies in poor financial health.However, the economy is always unpredictable and you cannot fully eradicate risk.
This means you should continuously monitor your customers’ financial health.
If you spot any of the possible warning signs here are the steps you can take.
You can be proactive and ensure that your customers pay you by making sure that payment expectations are clear. Outline the estimated costs and take time to answer any of the client’s questions upfront. Explain when the client should pay their invoice and what the full amount will be.
If your client keeps missing invoices it may be worth offering an incentive for them to pay early or on time. For example, you could say that if the client pays within one week they are eligible for a 5% discount.
If your customer’s financial health starts to dip you could ask for payment upfront.
This avoids an unpaid invoice. However, some customers may be hesitant to pay before receiving goods or services.
Asking for payment upfront could also put the customer under further financial pressure and you could ultimately lose them. If this is the case, consider asking them to pay a deposit.
If your client keeps missing invoices it may be worth offering an incentive for them to pay early or on time. For example, you could say that if the client pays within one week they are eligible for a 5% discount.
Charging late fees creates urgency among clients, encouraging them to act quickly to avoid a penalty. It’s important that you are transparent about these terms upfront.If the business is suffering financial difficulties, sending a late fee won’t encourage them to pay an invoice that they simply can’t afford.
This can prompt a customer to settle a late payment, or avoid you losing more money to them. But you should check that doing so is not in breach of your contract first.
If you are very concerned about your customer’s financial health, call in your debts with them as soon as possible. Clearly explain your concerns over the company’s financial position and state when you expect to receive payment.
Be compassionate and understanding—offer to meet with the directors and discuss are payment plan.
Red Flag Alert has data on every UK business. Our algorithm enriches this data by using 15 years of insolvency data to predict company financial health.
Our customers use Red Flag Alert to:
Users can search our database using over 100filters, including for characteristics like turnover, number of employees and the number of CCJs filed against the company.This allows businesses to quickly and easily create sales lists of prospects that match their ideal customer profile.We also provide predictive financial healthratings for every business. We rate healthy companies gold, silver and bronze, while businesses that are at risk of insolvency are rated one, two and three red flags.This can be factored in when creating sales lists, ensuring that you only target financially healthy businesses.
Red Flag Alert has over 20 years of experience in saving companies from bad debt, remaining compliant and achieving growth.
Our platform is available on a seven day free trial and will immediately protect and empower your business.
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