- How long are they in business? As a simple rule of thumb the longer they are in business the more stable they are. The critical time is between three and five years – where you will see the highest number of failures. So keep an eye on all customers as they go through this period. The key area to monitor here is the solvency ratios and cash flow.
- What are the prospects for the Industry sector? No matter how good the business is if the sector is experiencing a downturn, this will have an effect on all the businesses within that sector. Some will fail and others will emerge stronger. By definition, the fewer businesses that exist in a sector the stronger they will be. The key areas to monitor here is also solvency and also their efficiency ratios to see how well managed the business is. A simple rule of thumb here is that even if the sales are falling, as they will in a troubled sector, how are their costs in comparison? Are they taking the right decisions, are they keeping the business in optimum shape to maintain the required profit margins?
- How are they paying your account? Payment performance is another key measure in determining the credit worthiness of a business. If they continue to pay their account on time or even continue to pay at the same time every month, this demonstrates a well run cash flow system. If they are getting later and later every month this could herald problems in the future.
- How are they paying other suppliers? There is a lot of information available on payment performance and statistics held by a number of information providers on a business’s payment performance with their other suppliers. If your potential exposure is significant then you need to be getting this information on a monthly basis.
- What is their filing record? If they file all the correct documents in the Companies Office or Companies House on time, particularly their annual accounts, this demonstrates an openness and honesty that has to be taken into account, even if the news the figures contain is not particularly good. If no information is filed I think it is fair to assume that the figures will be worse than expected and your granting of credit should reflect this position.
- Every account should be assigned a Risk Rating; this can be as simple or as complicated as you wish. At the most simple level you should have a traffic light system where green is low risk, amber is medium risk and red is high risk and the accounts managed accordingly.
- From an internal perspective, every account should have simple terms associated with it, this defines the exact day and date that payment is expected. Depending on their Risk rating you can build in flexibility or not as you deem appropriate. For low risk accounts you might be prepared to continue to supply them for a week or two after the due date. High Risk accounts may be cut off on the first overdue day.
- Every account should have a Credit Line or Credit Facility associated with it, which represents that maximum exposure you are prepared to accept on every single account. This should be reviewed on a regular basis, particularly when an order will bring the balance above the set credit line. At that stage you should either increase the line or get payment before the next order is released.
This is the first task to be completed by every business that is serious about getting paid. You have to make sure that your customers are willing and able to pay you on time. Start with a proper Credit Application Form that asks the right questions and gets all the information you need to make an informed decision at the very start. Some of the things you should look out for are:
Author Declan Flood
Lifelong Credit Professional dedicated to improving the standard of credit.
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