For CFOs, there’s nothing worse than finding out too late that a customer is financially distressed and can’t pay their bills.
That’s why it’s important for your team to constantly have a pulse on customer risk and exposure, says Ed Bell Senior Management of Credit Administration at W.W. Grainger.
But what are the warning signs? How will your team know when to raise a flag or sound the alarm, so your company can avoid unpaid bills and troublesome relationships?
During a session at the National Association of Credit Management (NACM)’s 2021 Credit Congress & Expo Virtual Plus, Bell shared some insight. Here are 10 telltale signs a customer may be financially distressed that you can share with your team, so they know what to watch for:
1. A change in payment patterns
First and foremost, if a customer starts exhibiting negative behaviors that they didn’t previously – like missing deadlines or continually falling behind on invoice payments – it’s clear they could be in a financial bind. Bell says you should also be a bit wary if a customer asks to:
- increase payment terms (e.g., from the standard 30 days to 45 or 60 days)
- reschedule payment agreements, or
- plan repayments over multiple payments instead of paying invoices in full.
2. A shift in buying habits
Another sign of a financially distressed customer is if their purchases change drastically. In other words, if a customer was consistently buying the same product/service from you and that changes suddenly, your team should keep an eye on the situation.
And that doesn’t just apply to if your customer is buying less (i.e., an indication they don’t have the funds to buy their usual quantity). If a customer suddenly starts buying more, they may be trying to boost inventories before a bankruptcy filing, knowing they may not be liable for the products later on, Bell explains. This customer may also need the extra inventory to get them through the bankruptcy process, especially since there’s currently a tight credit market limiting the funds available for restructuring.
3. Dwindling cash flow
Hopefully, your team has access to customers’ financial statements. And they should use them to see if and how cash balances change over time. Also, find out how much customers rely on equity, short-term debt, or long-term debt, Bell advises, to see if they can maintain their operations through the generation of cash flow.
4. Higher (and unreasonable) demands
Is a certain customer making more noise than usual – returning items, unreasonably taking discounts, claiming damages to product or making crazy demands on delivery? It’s typical for financially distressed customers to start pushing the limits, making requests and demanding discounts that aren’t the norm, Bell says.
5. Large accruals
Here’s an easy one for your team to spot: A financially distressed customer often has large accruals on their balance sheets. If you see them, it’s worth looking into and finding justification. (Note: Your team should be able to find this information in annual reports or SEC filings.)
6. Withholding of financial info
Imagine that for a long time, a customer provided financial info for your team. Then seemingly out of the blue, they say they can’t do so anymore – maybe even giving a reason, like “it’s against our policy now.” That, Bell says, hints that they have something to hide. This financially distressed customer may want to keep any problems under wraps – and your company in the dark.
7. High Days Sales Outstanding (DSO)
If a customer has fallen behind collecting their own receivables, it may have trouble paying you. Bell says to ask, “What have sales and receivables done over time?” If a customer’s sales have stayed consistent but receivables have gone up, it’s an indication that they have a problem collecting receivables, which negatively impacts their cash flow.
8. Management changes
This is less of a red flag, but still something to still be aware of. Changes in management could mean that there’s a disagreement between executives and the company’s board of directors or owner, Bell says. So, your team will just want to keep an eye on customers going through major overhauls.
9. Persistent rumors
Your team should also stay tuned in and listen for any negative news or chatter about your customers. This is especially important when it comes to privately held companies, since they’re harder to obtain information from in general. Encourage your team to maintain open communication between sales, operations and credit personnel to stay up to date on the inside scoop.
10. Tax liens
Last but not least is an obvious sign of a financially distressed customer. A tax lien against them is a pretty sure indicator that their company is going under, Bell says. So, you’ll want to make sure your finance team understands and stays alert for any news on tax liens.
