Written by Craig Evans
Posted on 23/08/2018

If your client goes bankrupt, here’s why you should have known…

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Mark, the manager of a wholesale building materials business, nearly fell off his chair when he heard that one of his best customers had gone bankrupt. In his eyes, the construction company had always been healthy and busy – placing significant orders for building materials. Despite the owner having all the visible signs of a financially profitable business, this wasn’t the case.

The image Mark held of his customer wasn’t one that was grounded in fact. Companies always appear healthier than they really are. After all, which business is going to publicise the fact that it’s struggling to pay its bills, the bank is withholding credit and orders have gone quiet?

Heeding the warning signs of unpaid bills

Mark didn’t anticipate his customer’s bankruptcy, but there were a number of red flags he should have spotted to reduce his credit risk. Yes, the construction company always paid its bills and Mark had a good relationship with the business. But there were times when he’d had to send an invoice reminder to chase payment. On one occasion, he was even forced to visit the client when payment failed to materialise – but the invoice was paid soon after.

If you do have a customer that regularly pays late, it’s a clear sign that all is not well. For Mark, the result was 10,000 euros of bad debt.

The benefit of specialised business intelligence

Mark should have picked up on the warning signs and taken a closer look at his customer’s financial health, but he was blinded by the cordial relationship they had. When Mark spoke to Graydon, he asked how he could have anticipated the problem and how he should protect himself in future.

People usually assume they know their customer well – and that’s often the case – but there can also be some unpleasant surprises. If you’re running a business, you need to ensure you’ll be paid. Incurring bad debt – even from just one customer – can place your own financial health in jeopardy. To recover his 10,000-euro loss, Mark will have to generate a lot of extra business. Which is why specialist business intelligence agencies exist – as well as clear guidelines to harness business intelligence.

How to assess financial health

Graydon uses more than 80 parameters to establish the financial health of a business. The company’s balance sheet and annual accounts play an important role. If there are any inconsistencies in the official data, Graydon would review and seek to correct.

Additional elements, such as the presence of managers or directors involved in previous bankruptcies, a change of shareholders, capital changes or a recent relocation of headquarters, also play an important role.

Looking beyond the official data

In addition to analysing the official data, Graydon also looks at the softer facts that surround a business. It keeps a media database of any articles published about the relevant company, as well as any court correspondence. Graydon also supplements this with reputational research, for example by gathering information from suppliers regarding payment patterns. Through forming a comprehensive view gathered from a number of sources, it’s easier to build up an accurate picture – whether of a large company, sole trader or a start-up.

A new approach

So how did this experience impact Mark? He now has a more vigorous approach to researching his customers to make sure he won’t be caught out a second time. Those customers with unpaid bills or questionable financial health are currently receiving his undivided attention, while he’s also put in place a permanent monitoring system for all his clients. And new clients are of course subject to credit scoring checks.