A phone call could also sometimes weed out undesirable customers. “After being in sales for almost 20 years,” Burton relates, “certain individuals stood out as quality people and you quickly determined who you could trust with high debt, and who you needed to keep on a short leash.” The system at Peter Rabbit Farms allows Burton to closely watch the accounts receivable aging list and spot trends with different customers. He says fellow employees also keep an eye on the list.
“Things happen fast in this business,” points out Pancotto. “Tell your oper-ations and sales departments in your company when you suspect a business is troubled.”
And with today’s internet capabilities, researching questionable companies is just a few clicks away. For publicly-traded businesses, information is easily available, with stock prices and debt ratings published in many sites. If there are red flags or a company only exhibits a few warning signs, it may still be able to pay, just not as fast or consistently as before. Either way, it’s important to know what your risk tolerance is before negotiating payment terms.
Workable Solutions
“You have to have a sense if [a customer is] capable of paying you back or not,” advises Burton. If you’re confident the company can pay, then proceeding on a cash basis, temporarily, may be the best bet. He recommends telling the company’s representatives that orders will be filled once the money has been deposited.
Another consideration is high volume. When markets are hot and pricing for a product goes through the roof, Burton says to be especially mindful of which customer gets the lion’s share. With each pallet worth a few thousand dollars, a truckload can ring in at well over $50,000. When a customer with little
in the way of assets takes billing on a large amount of high-dollar product, Burton says to watch very carefully. “It might be better to have the end-customer take the billing instead,” he notes, as this company is probably more likely to “have significant assets to allow the process to move forward.”
Bottom line, call or visit a customer at the first sign of trouble. An on-site visit can provide a wealth of information, such as the demeanor of employees, if the premises is a mess because of curtailed janitorial services, or if there are high-level closed-door meetings.
If the customer has been loyal, always paid on time in the past, and gets in touch to discuss a problem, it is worth the effort to try to work out a solution. Pancotto says she would still do business with a company in this type of situation. She does, however, agree with Burton that asking the customer to prepay for future orders and/or reducing the credit limit is in order.
Of course, sometimes it is necessary to stop doing business with a troubled company, especially if it has missed multiple payments or obligations. “We usually weed them out ahead of time, so we don’t have a lot of high risk situations,” Pancotto says, “but they can slip through the cracks if you haven’t done business with them in over a year.”
Final Words
Being fully aware of the warning signs of a financially-distressed company provides the best options in a negative situation. Not only will this foresight give your accounts receivable team the chance to take action sooner rather than later, but it will help prevent putting your business in a precarious position or putting your assets at risk.
