Nonpayment warning signs to protect your business

Nonpayment signs to protect your business

As a business, you rely on your customers and their ability to pay on time. This is at the heart of your positive cash flow and key to survival, especially in the short run. If one of your customers goes bust, this could have a serious impact on your financial stability. Do you know the warning signs of your customer’s financial distress? Make sure to protect yourself against a possible payment default.

For illustration: If you lose 20.000 euros due to nonpayment and you have a profit margin of 5 percent, you would need to sell 400.000 euro’s worth of turnover to compensate this loss. Luckily, there are ways of reducing this risk.  For example, getting to know your customers and monitoring changes in payment behavior can already go a long way: you can prepare a buffer, protecting your business and enabling you to focus on growth.

Do you know the 6 warning signs to detect your customer’s financial distress?

1. Changes in payment behavior
    Are you noticing increasingly late payments from your customer which did not happen prior? This could mean your client is suffering from cash flow issues. Changes in payment behavior are usually one of the best indicators of liquidity problems. Similarly, does your customer keep asking for extensions? Have there been unexpected or more frequent requests to extend payment? Of course, a one-off request could be normal, but if this becomes more of a pattern, it could devolve into a nonpayment.
   
   
2. You often hear excuses
   Recurrent excuses are a telltale sign of trouble. Among the much used excuses are: Our accountant is on holiday, we’ll take care when he/she gets back, we have problems with the system, there was a fault with the supplies and so on. Make sure that your terms of payment are well defined and signed by your client. This can save a lot of time in the event of a dispute.
   
   
3. Your customer is difficult to reach
   Is your customer not returning calls or do you suddenly have difficulty reaching your usual contact? If the phone keeps ringing when you call, this is could be a sign of problems. If a customer does not contact you after repeated attempts, it is best you start to take action.
   
   
4. The management of your customer is not very stable
   Is the management of the company linked to bad performing entities or bankruptcies? Does the management have a less than stellar track record? The track record of the management is usually a good indicator of future performance.
   
   
5. A lot of changes
   Are there often management or internal structural changes or have there been other forms of instabilities? Large and unusual changes in management could signal problems. Beware for changes that are out of line with past practices and especially if they bring on a restructuring officer.
   
   
6. Less and less clients
   Is your client increasingly dependent on a small number of clients? A high concentration risk is something to look out for as it can send shocks all across the value stream. One downstream company going bust might mean one of the upstream companies will have difficulties collecting its receivables.