As a small business, it’s vital you set your payment terms and improve your cash flow to make sure you stay solvent. You need to ensure your interests are protected when you deal with other businesses and new customers, particularly if the order is large and requires a lot of investment.
Are you supplying to a business that is a notorious late payer? One of the first things that happen when a company is experiencing financial difficulty is that they’ll stop paying their suppliers. As the supplier, this hold-up can cause serious harm to your bottom line and impact your cash flow, and perhaps your need for finance.
“Chasing a business to pay you can be a frustrating and takes a lot of time – time that could be spent growing your business,” says Damien Stevens, Veda Senior Product Manager.
For small amounts, you might think it’s easier to continue offering payment extensions. Instead you should consider sourcing information on the status of that business and determine whether or not that business is still trading, insolvent or in financial difficulty. This will help you decide on the best course of action, says Stevens.
The warning signs are always there – if you know what to look for
Cash flow can make or break a business. And if a company stops paying its suppliers, a ripple effect will radiate out from the original insolvent business, damaging any unprepared company it comes into contact with, says Stevens.
Early indicators of potential insolvency include how fast a business pays its suppliers, and if they have any negative credit history.
“Other obvious warning signs of a company in financial distress include retrenchments, slowing turnover translating to poor sales, unsustainably high levels of debt and poor cash flow,” he says.
“To avoid being caught unawares, businesses need to be able to see the signs of financial distress ahead of time, and have proper processes in place to keep themselves safe.”
What the Dick Smith and Koko Black insolvencies teach us
You won’t always see it coming, unless you look for the signs. In the case of high-profile business closures, Stevens says both Koko Black and Dick Smith had clear signs of insolvency before they went under, but people just didn’t know what to look out for.
Dick Smith was trading in a competitive space, had slow turnover, poor capital structure, unsustainably high levels of debt and poor cash flow, says Stevens. Its credit score declined into ‘risky’ territory over a two year period, which should have been a red flag to its lenders and suppliers, he says.
“Similarly, the closure of Koko Black was preceded by the business paying its creditors later over a period of several months,” he says.
“A credit check on both companies prior to their collapse would have shown several areas for concern.”
What can you do?
To minimise these risks, look out for the warning signs and use tools available to you.
One tool is SwiftCheck, a website where you can get a business credit report to find information on who runs the company, their credit history, how fast or slow the business pays their invoices and if they are having financial hardship.
“It provides a credit score which predicts the likelihood of insolvency within the next 12 months,” explains Stevens.
Here are three tips to protect your business, according to Stevens:
- Be careful when signing new customers. Businesses can be blindsided by the promise of big revenues. But there’s no point signing up a customer who seems lucrative if the payday never comes. Do your due diligence before you take on a new business relationship.
- Do checks upfront. Don’t be shy when it comes to doing initial checks. If you know your customers’ credit profiles you can minimise risk and won’t be caught unawares by a business entering external administration.
- Don’t get complacent. A customer’s cash flow could change at any time. Check in with all your customers on a regular basis and use the available tools, like a credit report, to protect your business against losses.
Written by: Thea Christie
For more information on avoiding bad suppliers and customers visit Veda
Veda is a data analytics company and the leading provider of credit information and analysis in Australia and New Zealand.