Begbies Traynor Group

How Can You Spot The Signs Of A Customer Or Supplier In Financial Distress?

Date Published: 22/02/2020

The ability to spot when a customer or a supplier is in financial difficulty is extremely important in safeguarding the stability of your business. If certain warning signs are missed or ignored for too long then the failure of a client or supplier could have negative and far reaching effects for your own business, especially through the loss of business or unpaid invoices.

So what are some of the warning signs that one of your customers or suppliers is in distress that you should be looking out for?

Cash Flow Problems

One of the most obvious signs of a company in trouble is an imbalance in their cash flow. Simple signs such as the late or only partial payment of invoices are a classic indication of a company that is experiencing financial difficulty. If a customer is not paying you then it is likely that they are also not paying other suppliers, HMRC or even employees. Another classic sign of a customer in trouble is if they suddenly become harder than usual to contact, often signifying that they are ignoring you. Whereas if a supplier suddenly changes the terms of their contracts, for example reducing the length of their payment terms then this can also be an indicator that there could be trouble ahead for them.

Management Issues

There are a number of ways in which studying the behaviour of senior management at a company can indicate its health. An obvious sign of a company in distress is when top employees start leaving the company in higher than natural numbers. It is also a good idea to look at the levels of dividends that are being paid to the directors and shareholders of the company. Even if these seem to only be gradually declining this can still be a sign of financial trouble, as dividends are often one of the first items to be decreased or eliminated altogether.

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Unexpected Sales

Typically investors in a company will look to sell off large amounts of stock ahead of periods of financial difficulty, so monitoring the movements of company shares can be a useful forecast of trouble. However, it is important not to infer too much from this as stock movement can also simply be a natural financial procedure. Therefore it is worth attaching more weight to any unusually large or frequent transactions.

Also for some businesses it is natural to sell off unwanted or underperforming arms of the company, property or equipment. However, if a company starts releasing more integral assets then this, it could be a sign of financial distress. Selling the rights to produce their flagship products, auctioning off intellectual property rights, downsizing the company’s headquarters or selling any particularly important pieces of equipment could raise short-term capital, but could also leave the company in uncertain waters going forward.

What to do if you believe a supplier could be in difficulty?

If any of these signs seem familiar of any of your suppliers or customers then it is prudent to start lowering your financial exposure to them and seeking business diversification tactics if necessary. There are also a number of companies such as Red Flag Alert which can pull together all available information about a company and highlight any factors that could adversely affect your business with them. These easy to use services could provide you with the preliminary information required to keep your business safe and prosperous.

Begbies Traynor Group is vastly experienced in providing advice to distressed companies, or those that are working with them. Our expert team are able to fully assess your situation and offer advice and guidance to help you to weather the storm. Contact us today to find out more.

About The Author

Meet the Team

Jonathan was a founding director of Cooper Williamson which was acquired by Begbies Traynor in October 2013. 

Jonathan was involved in the inception and continued with the development of the "Real Business Rescue" website, which provides advice and assistance for the directors of limited companies which are experiencing various degrees of financial distress throughout the UK. 

Jonathan is a member of the Insolvency Practitioners Association MIPA and is a Member of The Association of Business Recovery Professionals MABRP.

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