How would you know in advance if one of your customers was going to fail?
The stark reality is that you don’t unless they tell you! Financial difficulties aren’t something your customers will readily talk about. Monitoring the financial health of customers is not always easy, but here are some red flags that you might look for:
- Providing excuses for non-payment
- Changes in the normal payment pattern
- Changes of ownership and strategic direction
- Requests for longer credit terms
- Deterioration of credit ratings
- High turnover of staff
By trying to proactively assess their creditworthiness, liquidity, and debt levels, you can identify customers who may be at risk of defaulting on payments or experiencing financial difficulties.
This insight then allows you to make informed decisions about extending credit, adjusting payment terms, or implementing precautionary measures to safeguard your business’s interests.
Most customer relationships are built on trust and mutual understanding. By monitoring your customers’ financial health, you can address their financial challenges and offer support. By providing guidance when needed, you strengthen the bond between your business and your customers. This fosters loyalty and encourages long-term partnerships, ultimately benefiting both parties.
Requesting and reviewing customers’ financial statements, such as balance sheets, income statements, and cash flow statements, is a fundamental method for assessing their financial health. These documents offer a snapshot of the customer’s financial position, profitability, and liquidity.
Understanding the key financial ratios, trends, and comparing them to industry benchmarks can provide insights into their overall financial stability.
Interpreting financial data accurately requires expertise in financial analysis and an understanding of relevant industry benchmarks. Extracting meaningful insights from complex financial statements and ratios can be challenging for businesses lacking financial expertise. Investing in skilled financial professionals or partnering with external consultants can help navigate this complexity and ensure meaningful and accurate analysis.
Are you able to monitor all of your customers all of the time?
Clearly, the larger the customer, the greater the impact to your business of an unforeseen bad debt. Why not gain a health check on your three largest customers? We’ll provide an overview of the credit risk attaching to your 3 biggest customers based on the view of a panel of our insurance partner underwriters. This will deliver valuable insights into credit risk, allowing you to make informed decisions about the level of credit offered to your top customers.