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Why it pays to conduct a regular financial health check on your customers

Ask any entrepreneur or CEO and they will tell you that running a business is full of ups and downs. Take the current business environment for example: the world is facing an unprecedented slowdown following a decade-long expansion that was brought to an abrupt halt1 by a global pandemic.2 The extent of the disruption to economic activity is encapsulated in the findings of our latest Payment Practice Barometer survey , which shows that the value of overdue invoices spiked to 52% – up from 29.8% in the previous year – of the total value of B2B credit sales in Asia.

The survey also found businesses expect bad debts and insolvencies to continue rising into 2021, which concurs with Atradius forecasts and the views of leading economists worldwide. It’s not surprising that businesses of all kinds, regardless of size, industry or geography, will find it a challenge to navigate these tough conditions. With research showing that over half of all bankruptcies can be traced back to poor credit management practices, there is a lesson here for every company: to safeguard the bottom line, it is essential to know your customers well. And, to do so, you should conduct periodic checks of your customers’ financial well-being.

Taking the first step

Examining the financials of a customer provides detailed insights into their operations, including market performance in relation to competitors, their long-term future, and their ability to meet payment obligations. Ideally, the best time to initiate a financial check is during the sales process – before the relationship is formalised.

Begin by examining basic facts, such as a company’s legal name and registration to ensure you are dealing with a legitimate entity. Then move on to financial records, such as the company’s trade volume in relation to its size, the performance of specific divisions that your firm regularly does business with, as well as the company’s payments history to check for past late payments and defaults. This helps determine payment terms – for example, whether to use trade credit or cash – and should help reduce the chance of bad debts

A going concern

Having taken this crucial first step at the beginning of a relationship, it’s equally important to follow it up with regular checks. Because even long-established companies with a robust track record can find it challenging to honour payments to suppliers during times of extreme economic stress.

Making the financial check a regular exercise – ideally to be conducted whenever a company releases its financial statements – helps identify red flags, such as if a company is taking on too much debt, shifting suppliers too frequently or unduly pressuring suppliers for an extension of their credit limits, all of which may be signs of strain. Financial checks will also bring to light any profit warning advisories or changes to accounting procedures that could have a material impact on their payment practices.

Companies also benefit from periodic checks as they allow for the scrutiny of a customer’s overall reputation, its boardroom practices, and the backgrounds of its executive leadership, all of which can change over time and the ebb and flow of a natural business cycle.

Undoubtedly, conducting periodic financial checks on every customer can take up a significant amount of company resources. At the same time, it’s not a task you can afford to ignore. Professional credit insurance underwriters can help shoulder this critical responsibility, using their in-depth knowledge of markets and customer behaviour to closely monitor your customer base, and allowing you the freedom to focus on growing your business.

Would you like to know more about the warning signs of a company in trouble?

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