It is a common story in the business world that businesses go under simply because they could not recover their customers’ money. After all, having key customers that are struggling financially is one of the leading causes of company insolvency.
However, there are several signs that every business owner should be aware of (A) and steps that he could follow (B) to protect his business.
(A) The early warning signs of customers’ insolvency
Customers do not become insolvent overnight. Typically, many insolvency warning signs indicate a customer who’s struggling financially.
1- Not paying on time
Suppose a customer is not paying on time or not paying at all, and the business owner is always chasing the latter for money. In that case, this could indicate that the customer’s financial status is not so well. There is a reasonable probability that he may be going into insolvency.
2- News of his business
It is important always to be updated on the industry or business of the customer. There will always be news and speculations around people’s business, which could be a good indicator of where his business stands.
For example, firing many employees simultaneously is a sign and considered a potential red flag.
3- Accruing losses
When news circulate the constant losses of a customer’s business, or when the business is making a small profit that isn’t sufficient to cover all its expenses, this could be considered an indicator of a customer’s financial troubles.
It is important to consider more than one indicator to determine the financial status. A customer in default of payment doesn’t automatically mean that he is going into insolvency.
Bottom line, a study of the whole situation is needed to be accurate from a customer’s standpoint.
(B) Steps that could help to protect the owner’s business
Sometimes, not being able to take back the money a business owes from a customer is unavoidable. That doesn’t mean that a business owner cannot protect his business and take adequate measures to ensure that the damage won’t cause your business drastic outcome.
1- Diversifying your customer’s portfolio
One of the main reasons a business stumbles after a customer’s insolvency is when such a business relies on few key customers. As a result, when one of these customers goes into insolvency, it will dramatically impact the business and make it hard for it to move on.
For this reason, any business owner should seek to diversify his customer’s portfolio. In this way, even if one customer becomes insolvent, the business will have other customers to rely on to cover its losses as much as possible.
2- Cash flow
After all, cash flow is the critical element of any business’s well-being. For this reason, when a customer becomes insolvent and consequently not able to fulfill his obligations towards a business, the latter will face cash flow problems, specifically if this customer is important to the business.
This is why the business should take appropriate measures to improve its cash flow.
Such measures may be the following:
a) Reduce business expenses.
b) Focusing on elite customers who leave you to get on with your work and always pay their invoices on time.
c) Sell assets that are not essential.
3- Insert a clause in the contract
The business owner can, for example, insert a clause in the contract stipulating that the passing of the title of the goods will be supplied after the customer pays in full the price of the good mentioned above. This clause is known as the retention of title clause.
Another beneficial way is, creating means of security such as a pledge, delivering an asset to a business owner to hold until an obligation is performed. The business owner will be entitled to sell the pledged asset if the obligation is not performed. It cannot always be applicable, depending on the nature of the relationship between the customer and the business owner. In the case where it can be applied, it is very beneficial.
Many businesses fail because of unrealistic cash flow assumptions. The problem is not noticed until it is too late, so staying aware of the warning signs and taking adequate measures as listed above are a must.