Did you know that in 2014 there were 39,085 insolvencies in the UK, which averaged to 752 insolvencies a week? Even as the economy is coming out of recession no business can rest on its laurels, especially as giants such as City Link, HMV and Farnrise Construction have become insolvent in the past few years, proving that it doesn’t matter how big you are, you can always fall. If a customer of yours becomes insolvent, it could affect your cash flow and unfortunately once formal insolvency processes have started; you cannot start or continue any action to recover the money owed to you. You need to keep up to date with the procedures to take action before the insolvency process gets underway.
So how can you spot an upcoming insolvency?
The best thing you can do is monitor your customers. If you don’t keep an eye on them, the only way you will hear if they are in any trouble is if they start paying you late, contact you directly or if their lawyers contact you, however by then they could have missed payments and started insolvency processes, so it may well be too late.
Here are our top tips on how to spot an upcoming insolvency. Remember, if any of these changes are occurring in a company you are monitoring, it doesn’t necessarily mean they will be entering insolvency, but it is worth looking for these signs as they are the usual tell-tale signs of a business starting to struggle.
Reviewing a company’s payment trend– A Creditsafe credit report can show you a customer’s payment trend, which is how soon they pay their bills compared to everyone else in their industry, and it can also show you if they are getting worse or better at paying. It’s not always the case, but a tell-tale sign that a company is struggling is when their payment trend worsens. If this happens, put the company higher on your radar or check it more regularly for other signs of a decline in the business, it’s also a good idea to check their financials.
Reviewing their financials– The financials tab on a Creditsafe credit report will show you profit and loss, the company’s balance sheet, capital and reserves, cash flow and ratios among other miscellaneous information about the company. It will also give you a percentage that shows you if the figures on the financials have gone up or down compared to the previous year so you can monitor their success over time. This is a very good tool to use as if you have been dealing with a customer for five years, and for the first four years their figures have been going up or remained steady, then suddenly the previous year they have gone down, you can navigate when problems started occurring and can monitor if they affect the financials so badly that they cause them to worsen.
Checking their credit score– A credit score on a company credit report will take into consideration all aspects of the company and change the score accordingly to any changes that have happened with the company. So even if you don’t understand the financial side of a credit report, a quick glance at the credit score will show you if the company is doing well or not. Our ratings are on a scale of 0-100 and the closer a company is to 100 the more creditworthy they are deemed. You can also view the tab ‘Event History’ on your Creditsafe credit report, and this shows you the previous changes to the credit score of that company and the changes within the company in general. From here you can see what changes occurred around the same time that the credit score changed, gaging the reason behind it.
Monitoring their credit Limit– Another thing to monitor is a company’s credit limit. If you are already doing business with them, you have a contract set up and have a regular exchange of money; their credit limit could have changed since you started doing business with them and you wouldn’t know. If their credit limit drops on their credit report, there is a reason for it. A credit limit is how much we recommend a company can be invoiced at one given time, and if it drops, it could indicate that the company can’t afford to pay out as much as they previously could, which could affect your cash flow if you made a deal with them when they were able to afford a higher amount.
Checking their media reputation-The quickest way people find out news these days is through the internet, with live updates streaming straight to their laptop or smartphone. If you have failed to monitor your customers and one of them is on the brink of or has entered insolvency, it will be picked up by the media, especially if it is a big company. Smaller companies are more likely to be picked up by local newspapers; however it will still travel across the internet. By this time, if the company has already entered insolvency, there is not a lot you can do. However if you keep an eye on their media situation through Creditsafe’s Media Solutions, the media may have picked up on something that you missed at an early stage or they may have official sources that have given them information about the company. Remember the media may have access to a credit checking company, so even if you’re not monitoring a company, they may be. It is always best to check ahead of time than too late.
Creditsafe’s Risk Tracker can monitor your customers on a daily basis, and will alert you by email if their credit status changes. This saves you the time and effort of manually credit checking your customers regularly, Risk Tracker does it all for you.
By monitoring your customers and checking these vital aspects of a credit report, you are in a better position to spot insolvency on the horizon of one of your customers than if you weren’t. Creditsafe offer free demo’s to all our customers on how to get the best out of the system, give us a call to book in now!