“I should have seen it coming.”
Sadly, those are common words in the debt collection agency world. All too often, when a debt goes bad, the credit grantor has overlooked one or more clear warning signs.
It's wonderful to be optimistic and trusting. Many entrepreneurs start off that way, and gradually grow more cynical after a succession of disappointing experiences. When it comes to your Accounts Receivable, vigilance is always the best approach. And at times when the economy is struggling, it's critical to your survival.
How can you tell when bad debt is on the horizon? Here are 10 red flags business owners and AR Managers should never ignore:
1. A sudden change in payment habits. If a customer who always pays on time is suddenly late, something is wrong. Set a serious deadline and be prepared to turn the file over to your collection agency if the commitment is not met. Hawk-eye the account until things return to normal.
2. The economy has slowed down. This is a general warning sign for businesses of all kinds, and especially within certain industries. If you have operations in Alberta right now, or with oil and gas related businesses anywhere, you need to stay on top of your Accounts Receivable and act quickly on any concerns. Don’t be caught at the wrong end of a line of of tipping dominoes.
3. Your customer admits cash flow problems. When you call to follow up on an overdue account (which you’ll be doing promptly, right?), sniff out the reason for the delay. If the debtor tells you that his or her own customers are slow to pay, it's a major red flag. Establish your company as the debtor’s top payment priority and be ready to turn the account over to your collection agency if there is a further delay in payment.
4. Your calls go unanswered. If a debtor has suddenly become unreachable, you are almost surely headed for trouble. People go on vacation and get tied up temporarily, but it’s unprofessional to be unresponsive to a creditor for an extended period. Leave a serious voice message (back it up by email) with a deadline and consequences, and turn the account over for collection if you don’t hear back promptly. If the debtor’s voicemail is full or the phone is disconnected, freeze the account and place a warning on your host system for the customer to contact your credit department. Pay a visit in person or send a letter, but do it right away—you've moved from a red flag to red strobe lights!
5. Your customer’s got new competitors. A business that has been operating successfully with few or weak competition can be poorly positioned to deal with a sudden influx of real competitors, or even a single good one winning over its customers. If you suspect this is happening, be particularly firm with your payment terms. Forcing your customers to make changes in staffing or operations sooner than later can actually be helpful if they’re in denial or passively hoping for a turnaround in their fortunes.
6) Sudden discounting. If you have a customer that has begun uncharacteristically slashing the prices of its product or services, watch out. Even if sales go up, margins will decline and the problem could easily become worse.
7) A decline in product quality. When price-slashing happens, product quality is often sacrificed. Deteriorating cash flow can also impact a business’s ability to pay suppliers and staff, and thus to deliver on time. If you’ve heard rumblings that your customer’s once-great product has gone downhill or they’ve suddenly become slow to fulfill orders, take heed: that's a company in trouble and quite possibly bound for failure.
8) Exodus of key staff. If important leadership personnel have been poached or left of their own volition, it’s a possible red flag. They may have departed because of internal problems, or been quietly laid off due to a decline in revenue. Neither is good. One or more top sales people moving to a competitor could also result in a sudden customer migration that could put the company in trouble. In any case, it’s cause to be concerned.
9) Change of course. If your customer was a market leader in its sector, and has suddenly begun marketing itself as something significantly different, it could be either a dangerous or desperate move. Watch for other warning signs and be prepared to pounce on overdue debt.
10. Commercial credit alerts. It can pay to use a good credit monitoring service if any of your customers represent receivables you cannot afford to lose. I recommend Acces-Credit for providing proactive alerts that can position you among the first to take action when your accounts are at risk.
Bad debt seldom happens without warning signs.
The key to avoiding trouble is in maintaining vigilance and moving quickly when a red flag pops up.
Before extending credit, pull a credit report and watch for collection accounts, writeoffs, judgments or fraud accounts.
Don't ignore the warning signs, be vigilant and proactive, and yours will be among those “lucky” businesses that always come out on top!