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Most companies that fail to pay their creditors usually show one or a number
of early warning signs. The following list, by no means complete, will give
you a point of reference, but you should not act on any one piece of information.
That said, you would have to do something other than ‘watch the situation’.
If the cheque signatory is away for more than a couple of weeks, telephone someone
else that knows the signatory (better if this is someone that the signatory
is a friend of) you can then say, “I have not seen Bob (the signatory)
for some time’, the friend replies, “he was in the club last Friday”!
In a situation where the customer has made you wait for a cheque, and the cheque
is from a different bank/new bank, drawn on a personal cheque (etc.); you should
consider a stop on further deliveries/services You should obtain a credit report
or/and a new bank reference (you should do this periodically, whatever the situation).
Whatever you choose to do in response to a warning sign be fully satisfied as
to the customers ability to pay. If you cannot satisfy yourself ask the business
owner outright. Say, “I have noticed ‘this and that’ and it
puts me in a difficult position. I know this could be due to any number of reasons,
but if one of the reasons is a lack of cash flow then I need to be aware of
the risks involved, and find a way to help you through this period as I want
to keep your business.”
If you have a business relationship that allows you to ask the owner outright,
from the start, ask them! Once you know the reasons you still have to make an
impartial decision: this decision may include a certain level of risk but that
is a matter only you as the Client can decide.
• A new signatory - especially if new signatory not known
• Cannot meet 30 day invoices after 50 days: after 60 days you have a bad debt
• A change in order patterns
• A Change of banker
• Signatories away for longer than 2 weeks
• A change of director/secretary
• Customers product constantly changing - out of normal goods/services supplied
• A change in payment pattern
• Customers premises in disarray - stock levels low
• Customer pays cash on delivery
• Rumours within your chosen industry, from customers staff, your sales staff, other creditors who have had difficulty receiving payment
• A change of delivery/invoice address
• Cannot contact customer by telephone
• Customer will not return messages/answer phone
• Customer will not accept reasonable resolution of queries
• It is difficult to turn away sales on a hunch, gut feeling or any one of the above warning signs. One way of thinking is to imagine what damage would be caused to your company and cash flow if the creditor was to file for insolvency - if your conclusion is somewhere in the area of having to secure bank funding to meet the shortfall in cash flow, you need to make ‘hard and fast decisions.
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