There has been much discussion recently in credit industry events and forums I have attended about tell-tale signs to look out for if any of your customers are experiencing financial problems, which will ultimately impact payment of your invoices. It is vital not to overlook these as if you delay taking appropriate action you may suddenly be faced with your customer becoming insolvent and very little chance, if any, of recovering monies owing to you. In many ways this dovetails well on my previous article, and we tend to refer to this area as ‘red flags’.

According to the Cambridge Dictionary, a red flag is used as a sign of danger. For example, you are not allowed to swim in the sea when the red flag is flying, or it is telling someone in a race to stop. There are several red flags that a business should look out for in credit management, in particular those which relate to your customers’ behaviour.

When performing a credit risk assessment check, you should examine the customer’s credit history and credit score/rating in the credit report. Is the evidence of regular missed or late payments? Has their credit rating and/or recommended credit limit been lowered? This should be a warning that there is a higher risk of default.

Other questions to ask yourself as part of your risk assessment are:  is the company newly incorporated, have the directors previously been involved in failed companies? Are there any unsatisfied County Court Judgments on file? Even a recent change of ownership should prompt you explore further and find out what was behind the decision. It is also worth bearing in mind that new owners may want to go in a new direction; therefore, how will this impact your sales relationship with them?

Check the Companies House website to see if there has been a frequent change of directors. This is considered to be a sign of instability within the organisation. If there are several companies within the group structure which make it difficult to be certain about ownership this could be another red flag.

The credit manager’s main aim is to maximise profitable sales and minimise bad debts. Focusing on how to keep bad debts as low as possible means we have to be alert to any changes in the way our customer trades with us.

Areas to address are if the customer’s payments start to be received later and later or if they make an actual request for extended payment terms, especially if the volume of sales does not warrant this. Also, if the customer makes a part-payment or an on-account payment which you have not agreed to in advance. These could be an early indication that the customer is experiencing cash flow problems and making sure they prioritise their key suppliers.

Perhaps there has been an increase or an unusual pattern in the number of queries or disputes the customer is raising. Don’t just simply answer or turn round the queries but delve further to see what is behind this sudden change in behaviour.

It may be that your calls and requests for payment go unanswered or are not returned. Perhaps there may be a continuing unavailability of the person responsible for authorising payment of your invoices. It could be that you are informed by the customer that their company is going through a reorganisation or changing banks. You must not simply accept these replies at face value as they are more likely to be red flags as to the financial health of your customer. Instead, you should explore this further.

In summary, I strongly advise you not to ignore any changes in the way in which your customer behaves; in particular, with regards to payments, queries and being able to speak with them. Act quickly and take steps to prevent your debt exposure increasing. This could save you a financial headache.


Kevin Artlett FCICM ACII

October 2023


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