In today’s B2B world, buying product and services on trade credit fuels the growth of most private companies. There are many factors that go into determining a company’s credit worthiness, putting additional pressure on credit managers to make smart decisions by identifying signs of a business in financial trouble. Trade credit and the information that supports its limitations or allowance are essential to the growth of most businesses. Staying on top of the financial health of customers is crucial for vendors and suppliers during the decision making process. Customers and prospects with a stronger financial standing are more likely to receive trade credit and be approved to work with a wide variety of vendors with less limitations on the credit limits being offered.
It’s no surprise that in the past, credit managers and other financial decision makers would look into the financial past of a potential customer before deciding whether or not to work with them. But today, with the advances in technology and more robust data available, decisions can be made on a more educated level by looking deeper into the current financial health of businesses. While there is still no magic crystal ball that will predict a company’s next financial move, there are quite a few key warning signs indicating the likelihood that a company is in financial trouble. We can start by looking at a company’s payment and purchase behavior to evaluate the warning signs of a business in financial trouble.
Changes in Payment Behavior
Most companies in good financial standing will maintain consistent payment behavior. Monitoring a company’s payment behavior allows financial decision makers to identify priorities based on how that company pays, how quickly they pay, and whether or not there have been any recent, significant changes. You can also use this information to understand how companies like yours are getting paid.
Based on Cortera’s data we know that Manufacturing companies typically get paid the fastest at about 4.5 days late. We can also delineate that those same companies tend to pay other providers about 6 days late. This can be a good indicator that Manufacturing companies rank fairly high in terms of their importance to customers. If this number all of a sudden increases and we see companies start to pay key suppliers more slowly, this may be an indication that the company is experiencing financial trouble.
Decrease in Key Spending Behavior
What will frequently go hand-in-hand with changes in payment behavior, and can often be the most telling factor, is a noticeable change in the way a company’s spending in key areas dramatically drops. Depending on the industry a business is in, drops in specific spend categories may be early warning signs that a business is experiencing financial woes. Sports Authority recently filed for bankruptcy in March 2016. By tracking Cortera’s spend trends for Sports Authority, we can see that spend on Textiles started dropping as early as December 2014. As an apparel company, Textiles is a key spending area for Sports Authority so this drop may have been an early warning sign that product demand was down and the business was potentially on the verge of financial trouble.
Lack of Business Growth
Spending trends can also alert us if a business is stagnant or no longer experiencing growth. If we do not see increased spend in Operational activity, this could be a sign that a business is just staying afloat or not choosing to invest in itself. Flat or declining spend in people related expenses such as Business Services could represent a business that is on the brink of financial distress. Any company with a growing demand in business should invest in itself as far as employees, operations, introducing new products or services, etc. If these things are not happening, it could mean the business is not experiencing growth and therefore may not be a good candidate for a credit increase.
Letting go of a significant number of employees may also be a sign that a company is facing financial troubles. If a company lets go of a large number of employees all at once, or has continually let people go without re-hiring, then you may want to investigate before extending credit to this business. An example of this could be if we see a significant drop in the number of total licensed drivers or trailers for a trucking company. Understanding that drivers and trucks are key components for a transportation company to continue to operate, these layoffs could signify that a business may be experiencing financial stress. As credit professionals, leveraging your community can offer support about what may be going on with a particular business. Feedback from other credit professionals (such as through Cortera Circles) can help to identify if a business is downsizing for strategic reasons or if the business is at risk of default. Cortera’s News Alerts on your portfolio will keep you informed if a company is experiencing a reorganization or downsizing allowing you to make sound financial decisions before it’s too late.
By identifying a business in financial trouble and taking action, you can save thousands of dollars and avoid getting financially burned. One of the most effective ways to avoid these risks and make educated decisions is by investing in B2B credit data & reporting services. See what products Cortera has to offer, and contact us today to schedule a free demo.