Supply chain 8 December 2017

Why it’s more important than ever to do your due diligence at Christmas

business legal responsibilities
If you’re starting to do business with a new supplier, it’s essential to thoroughly check it is creditworthy beforehand

It’s easy to let due diligence slip when you’re in the midst of the Christmas rush, but in fact it is the most important time to check carefully who you are doing business with, writes Rachel Mainwaring, operations director at credit report agency Creditsafe.

For many businesses, Christmas is a peak time of year when demand for products or services spikes and the orders stack up. For some, earnings at Christmas represent a major slice of the whole year’s turnover, but for others it could be a time of falling into difficulty.

You may be saying “let the good times roll” as you contemplate the festive season that is now upon us, but Christmas can also be challenging in several respects. This makes it essential to do your due diligence in regard to who you are doing business with.

Peak turnover…but peak expenditure

For one thing, while Christmas may mean peak turnover, it can also mean peak expenditure. You may have to buy in considerably more stock or supplies than at other times of the year. You may also need to take on extra member(s) of staff to cope with the demand.

Add to that the running costs of potentially being open for business longer and energy usage that is higher than usual, and there are plenty of factors eating into all that extra revenue you’re anticipating.

The other challenge, of course, is cash flow. Paying for all the stock you need can put a big strain on your finances. It may be a couple of months before you see the funds coming in at the other end, so it’s crucial to prepare for this and ensure you don’t put your business in financial risk.

Check who you’re doing business with

It’s more important than ever to check carefully who you are doing business with. It’s easy to let good practice slip when you’re in the midst of the Christmas rush, but in fact it is vital to keep those practices going.

If, for example, you’re starting to do business with a new customer or supplier, it’s essential to check them thoroughly first to make sure they are creditworthy. One place to start is by checking their company credit report.

A credit report gives you all sorts of information that will help you form a view of the company and whether you are happy to do business with them. It will show you all company details and key financials throughout the previous 5 years, so you can see if the business is thriving or struggling.

Credit score and more

A company credit score summarises all the information in a credit report and grants a score to a business based on the likelihood of it becoming insolvent. You can also view a company’s payment behaviour based on real experiences, so you are able to know how soon, on average, they pay their bills. This is especially important if you are concerned about Christmas cash flow.

A credit report also shows whether a company has any CCJ’s against them: this could be a red flag for you or mean that you want to insist on special terms with them, such as payment before delivery.

In addition to these insights, there are a number of slightly more subtle aspects that you might want to check for on a company credit report:

  1. Changes in directors

Directors naturally change from time to time within a business, but if it becomes a trend, it could be a sign of deeper issues within the company.

  1. Directors with previous failed ventures

You can check individual directors’ histories – and if they have a record of previous failures, this could be a warning sign. If a director has been involved in a company that has failed in the last three years, they are nine times more likely to fail again compared to a director who has never been involved with a business collapse.

  1. Spike in views of a company’s credit report

If other businesses are worried a company is getting into financial difficulties, then they may also check their credit status and report.  Look to see whether there has been a rise in the number of views. It could be due to other issues, but nevertheless it can be a useful indicator.

  1. Links with businesses with low credit scores

Many companies are owned by or have links with other businesses. Their financial position can have a knock-on effect on each other, so another thing to look at in a credit report is the information on linked companies and other businesses in the Group structure. Look at their credit scores and histories – it could be revealing.

Regular checks

Of course, it’s not just a matter of checking new suppliers or customers. It’s important to remember to regularly monitor existing customers too. They may have been fine at the start of the year, but especially in today’s volatile and uncertain world things can quickly change.

Christmas should be a positive and profitable time of year. Checking company credit profiles before doing business could prevent those January or even February blues when the bills are piling up and the payments still haven’t come in.

Rachel Mainwaring is operations director at Creditsafe

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