Staying extra vigilant for these signs that a customer is struggling could help avert disaster before it’s too late.
While these behaviors don’t necessarily mean a company’s on the brink of bankruptcy, if you notice one or more of these traits in a current customer, it couldn’t hurt to have your Collections department track it more closely.
1. An unsteady payment schedule. If a customer that has never paid late starts falling a few days behind each month, something is probably off. But chances are most examples won’t be this obvious. Even the most subtle shifts in payments should be monitored a little closer.
2. Recurring requests for extensions. Has a customer asked to extend its payment schedule from 30 days to 45 days, then the following month requested 60 days? You want to help your customers, but continuously granting extension requests may simply be putting a band-aid on a more serious problem.
3. Buying less (or more) often. Some companies have no problems getting their customers to pay — the problem is getting them to keep buying. It’s more than a marketing problem; if a loyal customer’s purchases have started dwindling, beware. The company could’ve found another supplier or, more likely, the firm could be under duress. On the other end of the spectrum, if a regular customer’s purchases suddenly skyrocket, it may not be a good thing. Chapter 11-bound firms often buy in bulk because they won’t be held accountable when the bubble bursts.
4. Cash flow is waning. Are you able to view your customers’ financials? If so, cash balances can act as a patient file into the firm’s financial health — their dependence on long-term or short-term debt, equity, etc.
5. Abundance of demands, appeals and requests. If customers start complaining about your service, returning merchandise that used to be fine or demanding reductions because of mysterious “damages,” take heed. Behavior like this often foreshadows big problems.
6. Sudden lack of disclosure. If you’ve been viewing a customer’s financial statements for years, and a hush-hush policy is capriciously implemented, there’s something they don’t want you to see. It may be worth it to take a stand and explain that transparency is a necessary part of your business relationship. Then, if possible, let them know you may be able to work out different terms that are more agreeable.
7. Ample accruals. Customers shouldering significant accruals could be in trouble. Your customers should be able to answer questions you have about accruals on its balance sheets. Won’t let you see their balance sheets? See #6.
8. Shifts in execs or management. Pay extra attention to any major changes in the managerial or executive makeup of your customers. Also, if a client has brought a restructuring officer onboard, your days of doing business together could be numbered.
9. Gossip and rumblings. With privately-held or particularly tight-lipped customers, sometimes your only means of finding out about problems is through the grapevine. While it’s probably not worth hitting the panic button over the first negative thing you hear, the same rumors from several sales reps or colleagues are worth looking into.
These are the most common warnings a company may be passing through rough waters. But there are other glaring signs a customer’s days are numbered. For example, if one of your clients has put off its taxes and is hit with a lien, anything they owe to you probably isn’t a top priority.
Given the current economic climate, many suppliers and vendors are coming up with creative, non-traditional ways to continue doing business with its customers.