During an unstable economic environment, companies must go to great lengths to ensure their market position, financial strength and durability. That means monitoring and controlling risks as much as possible. One of those risks consists of a company’s clients. B2B enterprises are particularly vulnerable because losing one large client can deal a significant blow to the company. The loss does not mean the future business, but if they file for bankruptcy, then even the current outstanding AR may turn into a complete loss.
It takes startups about 2 to 3 years to become successful and 7-10 to become truly profitable. Nowadays, businesses are shuttering left and right, so knowing what your partners and clients are up to is essential. Watching your business partners’ actions and indicators of financial health is not industrial espionage or lack of trust. It’s about understanding that the appearance of success can hide obstacles and failures that, if not tackled head-on, will negatively impact your partner and, ultimately your own company.
Here’s what to look out for when assessing whether your client is going to file for bankruptcy protection:
1. Delaying your payments:
If your client delays paying your bills on time, watch out. Tell your staff to take precautionary actions to prevent your AR from becoming too significant. Ensure that your account managers and liaisons understand the severity of the situation and all the steps of the process involved in reducing business losses. Start to send invoices and payment reminders more frequently, and instruct your staff to document all interactions with that client, especially promises to pay. Monitor the extent of account deficits. If possible, try to prevent delinquent clients from moving the goalposts of their financial obligations by imposing strict rules of repayment, and escalating as necessary. Don’t wait for too many of your clients to get perilously close to bankruptcy before taking measures to protect your company.
2. Layoffs or a High Turnover:
If the client is handing over too many pink slips, especially to those employees you feel are vital for their organization, that is a big red sign. Some turnover and layoffs are normal, but if you see it is way more than the average, try to find out what is happening.
People leave companies or are terminated for various reasons, and sometimes a company is healthier for it. That being said, a revolving door of employees and managers spells trouble to anyone watching. And the company wastes precious resources training new hires.
Excessive layoffs can be very demotivating. They are alarming because the remaining employees do not find enough reasons to stay, which means they have doubts about the direction the company is going. Employees almost always have some insider knowledge about company’s financial health; if they think that there is no future for them anymore, what does that say about the future survival of the company as a whole?
Employees can quit or be forcefully terminated because of low work volume. Even if that only happens behind closed doors, word will eventually get around that the company is struggling to sustain its operations and generate cash flow.
3. Borrowing too much
Having a bit of corporate debt can be beneficial because it allows a company to better use its cash resources. Having a disproportionate balance of cash and corporate debt can signify that your client is struggling to maintain their cash flow.
When a company applies for new credit to pay off old debts but has not been able to generate enough cash to pay them, it may signal to whoever is watching that an already dire situation may be accelerating. It is fine to refinance or restructure debts to free up some cash for growth or investments but to increase your corporate debt so much that it becomes impossible to pay it back is a financial disaster waiting to happen. The next step is often filing a Petition for Chapter 11 bankruptcy protection.
4. Starting to have a bad reputation.
Is your client’s reputation among investors, business partners, employees, and the community starting to take a hit?
A lot can be said about such a fluid concept in business, but reputation doesn’t just boil down to an image bolstered by successful marketing.
Instead, it is the credibility and respect created by your products’ quality, the professionalism of your leaders and employees, the honesty you show in your business relationships, and so much more. Those individual experiences by customers or clients of a business reinforce each other as strong strands in a web of trust when repeated by word-of-mouth, in writing, or on social media.
On the other hand, the more frail a reputation is, the more dangerous one blow can be. A data leak, discrimination against a minority, gossip inside the company that starts spilling into the public space, or any other action that may ruin your relationships within the industry and with your customers is a real threat to your company. Benjamin Franklin justifiably said:
“It takes many good deeds to build a good reputation, and only one bad one to lose it.”
In our world, where perception has become so important, bad reviews from clients and partners can lead to losing significant business, more so than the quality of the products and services a company offers. The image and pockets of huge companies are often impacted dearly due to insensitive or outdated posts on social media. Although unfair, some of their business partners may be negatively impacted by this, simply by association.
5. Expanding too quickly
Growth is the dream of every entrepreneur, but even in a good year, that can be dangerous. During an unfavorable economic environment, it can be fatal. Spreading yourself too thin, in too many directions, with resources and staff struggling to cover operations, could lead to an implosion. You don’t want to face a Chapter 7 bankruptcy filing where your assets are liquidated to pay off creditors.
Gradual expansion over several years is the more cautious approach, and now more than ever, making sure that what you already have is safe is the right way to go.
6. Lawsuits or problems with legal compliance in the form of complaints and inspections
A lawsuit may erode a company’s credibility, but it may also adversely rattle its partners and clients. However, when the primary regulatory agencies keep showing up for inspections or the number of complaints against the company increases, then the suspicion that there might be wrong-doing at the company rises. One of the most definitive ways to cease to exist as a business is to break the law. While you can turn around a company struggling with finances or bad management or other problems, the law is pretty unforgiving.
7. Losing big clients
Business owners tend to look out for new competitors as the big new threat to their market share. Big companies are slow to make dramatic decisions like cutting off a supplier or changing business partners, not only because of the sheer operational effort involved but also because of binding contracts, yet they will do it if a company doesn’t provide them what they need. With everyone trying to cut their losses and cut off unprofitable or optional sectors of their business, one has to be extra careful about how they treat all of their business clients. A pattern of behavior or failure to deliver will determine whether a client will stay with you or not.
Finally, one of the biggest problems or assets, depending on when and how you make use of it, is flexibility. Being able to weather the storm by changing your operations, prioritizing sources of reliable revenue, taking advantage of new opportunities and technological discoveries will help some business stay afloat or grow, while others will be left behind. The other side of the coin is when a business constantly changes, with unwarranted risks, and jeopardizes its stability. In a period of upheaval, as the one we’re experiencing this year, we need to pay attention to our clients’ decisions, whether it’s the reluctance to evolve, out-of-control splurging, expansion, or irrational changes.
