How to be aware of the Signs of Troubled Customers!.

Many companies require a great deal of cash to operate efficiently and get into trouble when they have little cash or are poorly capitalised. In order to cope with their cash flow problems they often maintain unprofitable and marginal accounts themselves and hold back from paying their suppliers on time. Both of these ‘strategies’ eventually lead to a decline in business reputation and ultimately the potential of a business failure.

There are countless ‘red flags’ that point to a potential problem within a company and although one or two indicators from the following list may not be significant, several simultaneously could spell trouble and should be heeded.

Signs of Potential Problems:

• Management indicators:

1. Frequent management changes indicating internal problems
2. Refusal to respond to requests for credit information
3. Inaccessibility of senior management for credit enquiries
4. Excessive irritation at credit or collection checks

• Financial Indicators:

1. Late filing of accounts and annual returns
2. A pattern of paying with post dated cheques
3. A rash of collection claims, suits and judgments obtained by suppliers
4. Failure to take allowable on-time payment discounts to gain cost advantages
5. A history of frequent changes of banks
6. Partial or erratic payments on account
7. Consistent heavy debt to net worth and persistent operating losses

• Operational Indicators:

1. Auction of equipment and irregular disposal of assets
2. Failure to keep pace with industry price levels
3. Returning goods without prior agreement and reducing payments accordingly to offset overestimated demand
4. Physical neglect of the premises
5. Slow down in payments with a pattern of excuses,
6. Purchases beyond normal needs

• Financial Ratio Indicators:

1. A low ratio of assets to liabilities and a low availability of liquid assets to cover short term obligations
2. A debt ratio reflecting a highly leveraged capital structure
3. An inventory turnover with systematic deviations from industry averages, indicating the existence of slow moving or obsolete inventory items
4. A high average receivables against percentage of sales, indicating overly generous credit terms and ineffectiveness of billing and collections

Make your credit control department a high priority. It deserves your full attention. Don’t count on your customers to give it their highest priority. Cash is the life blood of your organisation.

For more information please visit www.gcsaustralia.com

About the Author:

By Kevin T. A Partner of Global Credit Solutions & Debt Collection Australia. For more infor please visit www.gcsaustralia.com