What Should You Do if One of Your Customers Becomes Insolvent?


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July 5, 2022     |     Posted by:     |     Category: Blog, Corporate Recovery

Running a business can be tough. Some companies will fail. And sometimes those failing companies will be one of your customers. When this happens, it can have a detrimental impact on your business, especially if you’re ill prepared.

A cashflow forecast is built upon the assumption that every customer pays you in full and on time, and you’re aware of all bills and expenses as and when they fall due. In an ideal world, you have a suitable cash buffer to fall upon ‘just in case’.

You might be able to sustain a short period of late payments from a client who is struggling but in reality, these short-term problems can become bigger and more of an issue for your business. As much as you can’t control what goes on in a client’s business, you do need to keep an eye on what’s happening and spot those warning signs.

 

What the last two years has taught us

We now know that something totally unpredicted can come along and side swipe your whole business plan. Hopefully we’ve experienced the most extreme worst-case scenario and it won’t happen again too soon. We can’t really plan for such an event either.

The government support given was vital for those in the hospitality and retail sectors. It was a lifeline for those companies who couldn’t trade. Although it relieved the immediate pressure on cashflow, companies took on debt they never planned for, still in the midst of the pandemic. Some ended up in a worse position.

Others were able to take advantage of the financial support even though it was likely the business was close to or already insolvent. It was a temporary cash injection to continue just a little longer but the inevitable outcome still the same.

 

What are the warning signs of a client at risk of going insolvent?

All companies will experience dips in their cashflow – it’s all part and parcel of running a business. Whether or not there’s a pandemic taking place, cashflow can be impacted by more common issues like demand falling, supplier costs increasing, loss of significant contracts. Anything can interrupt the steady flow of cash coming into your business, and its something you need to be aware of.

Typical changes in payment behaviour that could indicate a cashflow problem include:

If you offer credit to a customer who may be insolvent, then you run a risk of not getting paid on time or possibly getting paid at all. You’ll be out of pocket having supplied the product or service and this could impact your ability to pay your suppliers.

 

How can I protect my business from an insolvent customer?

Sadly, there’s no crystal ball to use for you to identify potential customers who will become insolvent. Best practice says to run credit checks on new customers, but that looks at historic data and obviously any data looking at financial performance over the last 2 years is, well, going to be very skewed.

You can ask for deposits or even full payment upfront which would prevent you from being out of pocket, but not all clients will be willing or able to do that.

If a client is in arrears, you could look at debt collection agencies to take responsibility of recovering the money due. There is a cost for such services which you’d have to account for, and it could damage the relationship with your client in the long term, particularly if they are really struggling financially.

Realistically, you can look for the warning signs which we’ve mentioned and keep close to those clients who look like they are starting to struggle. Automated email reminders are useful when you’re sending out lots of invoices and can save you the time to nudge people, but don’t rely on automation to keep on top of potentially insolvent clients. You need to actively look at and review your clients, and where those warning signs are flashing, pick up the phone and have a conversation about what’s going on. It may be a blip, it may be something more serious, but you’ll understand better the potential impact its going to have on your business.

 

Is an insolvent customer impacting your business?

If you have a customer who is insolvent and the money they owe you is causing a strain in your business then you’d be wise to speak to an insolvency practitioner. This doesn’t mean your business is insolvent. It doesn’t mean you need to take any immediate action. No one will know that you’ve spoken to an IP. But you could get practical advice, specific to your situation.

Don’t leave any cashflow problem too late to resolve. We’re here and ready to help, so call us today on 0808 196 8676 or send us an email at help@trusolv.co.uk.


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