Every day, there are signals notifying us of an impending event. The traffic light changes to red, warning us to stop before traffic crosses in front of us; railroad crossing gates go down before the arrival of a train; or the smoke alarm goes off because something is very hot or on fire. All of these precursors are obvious and we know what to do for each occasion.
When you’re dealing with a company in financial distress, there are almost always indicators before everything goes awry. These precursors may be more subtle than the ones mentioned above, but being aware of the signs can keep you from being blindsided when a company files for bankruptcy, shutters its doors, or stops paying its customers or employees.
Early Symptoms
Among the earliest warning signs is slow pay or when a company doesn’t honor its obligations. “I promise to pay next week”—an owner might say, but next week comes and there’s no check or transfer. At this point, there is no need to panic, but accounts receivable staff should be concerned.
A number of years ago, Blue Book Services sent members a notice called “Seven Ways a Customer Becomes a Debtor.” John Burton, general manager of sales for Peter Rabbit Farms in Coachella, CA, cut it out and taped it to the wall next to his desk. To this day, Burton still refers to these warning indicators when doing business.
For the purposes of this article, we will review and update these caveats. Here are the seven warning signs—beware when a company: (1) breaks promises; (2) avoids phone calls; (3) asks to make partial payments; (4) has returned or nonsufficient funds checks; (5) requests copies [of invoices] constantly; (6) claims too many invoicing or pricing problems; and (7) uses you as a bank.
For his part, Burton provided another indicator for the list: a shakeup in staff, which can also raise eyebrows. “At one company, the comptroller quit, then two salespeople left,” he recalls. “I found out because the salespeople went to work for a competitor. When they called me for business from their new positions, I asked about the change and they told me their previous employer was in trouble. I made sure I got in line to get what money I could from the troubled company.”
Although it isn’t always the case, employees on the inside often know before outsiders when something is seriously wrong at their place of employment. They may be willing to share information, especially if they haven’t had a pay raise in a long time, the business has a hiring freeze, coworkers are already changing positions, layoffs are rumored, and overall morale is low. They’ll also know if the number of closed-door meetings has ramped up considerably.
Some businesses in trouble may cancel contracts with vendors and attempt to do the work themselves, like janitorial services or supplying coffee or other beverages. So when a trading partner’s accounting department doesn’t answer your calls or return them, it’s usually because there isn’t any positive news and talking to anyone makes them uncomfortable.
Every day, there are signals notifying us of an impending event. The traffic light changes to red, warning us to stop before traffic crosses in front of us; railroad crossing gates go down before the arrival of a train; or the smoke alarm goes off because something is very hot or on fire. All of these precursors are obvious and we know what to do for each occasion.
When you’re dealing with a company in financial distress, there are almost always indicators before everything goes awry. These precursors may be more subtle than the ones mentioned above, but being aware of the signs can keep you from being blindsided when a company files for bankruptcy, shutters its doors, or stops paying its customers or employees.
Early Symptoms
Among the earliest warning signs is slow pay or when a company doesn’t honor its obligations. “I promise to pay next week”—an owner might say, but next week comes and there’s no check or transfer. At this point, there is no need to panic, but accounts receivable staff should be concerned.
A number of years ago, Blue Book Services sent members a notice called “Seven Ways a Customer Becomes a Debtor.” John Burton, general manager of sales for Peter Rabbit Farms in Coachella, CA, cut it out and taped it to the wall next to his desk. To this day, Burton still refers to these warning indicators when doing business.
For the purposes of this article, we will review and update these caveats. Here are the seven warning signs—beware when a company: (1) breaks promises; (2) avoids phone calls; (3) asks to make partial payments; (4) has returned or nonsufficient funds checks; (5) requests copies [of invoices] constantly; (6) claims too many invoicing or pricing problems; and (7) uses you as a bank.
For his part, Burton provided another indicator for the list: a shakeup in staff, which can also raise eyebrows. “At one company, the comptroller quit, then two salespeople left,” he recalls. “I found out because the salespeople went to work for a competitor. When they called me for business from their new positions, I asked about the change and they told me their previous employer was in trouble. I made sure I got in line to get what money I could from the troubled company.”
Although it isn’t always the case, employees on the inside often know before outsiders when something is seriously wrong at their place of employment. They may be willing to share information, especially if they haven’t had a pay raise in a long time, the business has a hiring freeze, coworkers are already changing positions, layoffs are rumored, and overall morale is low. They’ll also know if the number of closed-door meetings has ramped up considerably.
Some businesses in trouble may cancel contracts with vendors and attempt to do the work themselves, like janitorial services or supplying coffee or other beverages. So when a trading partner’s accounting department doesn’t answer your calls or return them, it’s usually because there isn’t any positive news and talking to anyone makes them uncomfortable.
Detective Work
Michele Pancotto, credit and col-lections manager at Clipper Controlled Logistics in Chicago, admits she was once blindsided by a customer’s financial troubles. The two companies had been doing business together for a long time, and while the produce company was occasionally slow with payments, it always promised to pay. Then there were union issues and Pancotto’s firm took a financial hit, getting only a portion of what was owed.
Although some of the customer’s staff told Pancotto and others they were leaving, which should have been a clue, no one recognized the problem soon enough. To avoid such situations in the future, Pancotto now reads Blue Book’s weekly Credit Sheet reports to monitor changes at the companies she does business with. She watches for rating changes and expired or revoked PACA licenses, and when a business owner retires or if there’s a large turnover in personnel, that also raises a red flag.
“When I see ‘claims filed’ in the report, those companies go on my watch list,” shares Pancotto. “I know this may either be a product issue or a payment issue—the report doesn’t give those details, but I know if Blue Book had to get involved, the parties in question had an issue that couldn’t be settled without bringing in a third party.”
A single resolved claim usually isn’t a problem, but multiple claims with the same company signal the likelihood of financial trouble, she says. Another good bet is paying attention to the industry itself, such as a natural disaster or weather phenomenon that could have a major impact on supply or delivery. Knowing which factors could be influencing a customer’s situation puts creditors in a better position to predict or mitigate financial problems.
Burton also had a customer that didn’t exhibit much in the way of warnings before going out of business. “We’d been doing business with these people for a long time when they had a judgment against them for a substantial sum,” he explains. “The judgment wasn’t made public, so the troubles caught me off guard. The company stopped paying between 14 and 21 days, which is how long most quality payers take. I started calling them and got the runaround.”
So Burton took advantage of a relationship he had forged with the Western Growers Association, asking about the company in question. There had been three other inquiries about the same company and whether it was paying its bills. Eventually, the company did go out of business.
Embracing High-Tech Tools
Technology has changed the way creditors can handle accounts receivable and monitor customer accounts. In the past, phone calls were the norm; now most businesses communicate via email. While email is fast and provides a written record of every communication, Burton notes that it does take away from the personal touch of talking over the phone, which used to help build relationships and friendships.
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.
