By Rachel Mainwaring, Operations Director, Creditsafe
The number of insolvencies in the UK has increased considerably since the decision to leave the EU was announced. In Q3 2016, the period when Brexit was announced, 6,305 companies filed for insolvency. This compares to 4,434 in the same quarter in 2015. Such an increase (42%) is a worrying trend and a sign that Brexit could be having a noticeable impact on the nation’s business community.
Our analysis, which we obtained using our nation-wide company databases,also showed that this trend is not reflected in France or Germany, where insolvencies in Q3 2016 were actually slightly down on the same period during 2015.
The worrying thing is that if a customer becomes insolvent, you can quickly get embroiled in the fallout. It could affect your cash flow and unfortunately once formal insolvency processes have started; there isn’t a lot you can do to recover the money owed to you. It is therefore critical that you are alert to how your customers are faring and are able to notice an upcoming insolvency before it is too late.
Companies of all shapes and sizes can become insolvent and the recent recession has had some notable casualties such as Enron and Lehman Brothers. In the retail industry, HMV, Borders, Comet and Blockbuster have all gone under as well. It doesn’t matter how big you are; you can still fall.
The most important thing you can do is to 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.The good thing is that most credit reference services will allow you to monitor your customers automatically and send you email alerts when things change, however there’s no substitute for doing the leg work yourself. Here are five key things you should be looking out for when monitoring your customers:
- Review its payment behaviour– A Creditsafe company credit report can show you a customer’s payment behaviour such as how many Days Beyond Terms (DBT) on average, they take to pay their invoices. It can also compare the company’s DBT to others in its industry and the report can also show you their payment trend; signifying if they are getting worse or better at paying their bills. It’s not always the case, but a commonindication 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. This is because if a company is struggling then often the cash flow will worsen which means its creditors’ payments will suffer as a consequence. If this happens, put the company higher on your radar or check it more regularly for other signs of a decline in the business.
- Review its financials– The financials on a company credit report will show you profit and loss, the company’s balance sheet, capital and reserves, cash flow and ratios as well as other miscellaneous information. Financial information is a historical snapshot of what a company has done in its last trading period and will provide an insight into how a company is being run.
- Check its credit score– A credit score on a Creditsafe company credit report will take into consideration all aspects of the company and change the score accordingly. 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. A report also provides a commentary of what factors are impacting a company’s score and what variables are included within the scoring model.
- Monitor its credit limit– Another thing to monitor is a company’s credit limit. If you are already doing business with them, have a contract set up and have a regular exchange of money; their credit limit could have changed since the beginning of your contract and you could be unaware. 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. 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 previously able to afford a higher amount. An easy way to do this is to ensure you have a credit limit monitoring alert set-up for all your customers. This tool can be set-up through a credit reporting agency and will send you an email if there is ever a change in a customer’s credit limit– saving you the hassle of manually monitoring each and every customer.
- Check its 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. 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.
By monitoring your customers and checking these vital aspects of a credit report, you are in a better position to spot an insolvency and protect your business from harm.