Tax & admin · 30 May 2017

Five early warning signs that your client is in financial trouble

financial trouble
If a company is fighting for its survival, it will try to find any excuse for not paying you

In his latest article, Grid Law founder David Walker reveals the early indications that could mean your late-paying client is suffering from financial trouble, and how to navigate this potentially tricky situation.

One thing I hate is going to court, winning and being left with an empty victory. All the time and effort you put into the case is completely wasted if ultimately the defendant cannot pay and they simply wind their company up, leaving you with nothing.

For some of my clients who are trying to recover their unpaid invoices, it’s enough that justice has been served, but I take a more practical view. I want to see real value for my clients and that means recovering their unpaid invoices, or at least getting more back than they spend fighting the claim.

To do this, it’s imperative that you take action sooner rather than later and therefore you need to be on the constant look out for early warning signs that your client may be in financial trouble.

In this article, I’m going to give you five early warning signs to look out for and explain what to do if you spot any of them.

Erratic payments

One of the first signs that your client is having financial trouble is that their payments become erratic. This doesn’t just mean they pay later and later, you may find that you start receiving only part payment of your invoices.

This is usually a clear sign of cash flow problems. Your client is probably juggling their suppliers, paying what they can, when they can and often only paying the supplier who is shouting the loudest for payment!

If you don’t know when payments are arriving, or if you receive less than expected, you can’t budget to pay your suppliers on time. If you’re not careful, your client’s cash flow problems can cause problems for your own cash flow too.

In this situation, the more certainty you have the better. Try talking to your client and work out a payment plan that they can stick to.

Deteriorating staff morale

If you know how your client’s staff feel about their work, you can often get a good indication of the general health of the business. If they’re unhappy, it’s a sure sign of trouble.

This is where having a good working relationship with your clients pays dividends because it’s amazing what you can pick up through small talk as you’re on the phone to them.

Obviously, if you find out that there are risks of redundancies or that staff benefits are being cut you know there are financial problems, but some complaints are less obvious warning signs. For example, if the staff are complaining that they are worked off their feet it could also be a sign of trouble.

While it may suggest there is plenty of work coming in, it could be because staff are leaving and are not being replaced. This will make those that remain artificially busy, so don’t be afraid to delve a little deeper to find out what is behind the problems.

Falling profits

No company can survive long term unless it’s profitable so you need to be alert to a client’s falling profits as early as possible. This can be a difficult trend to spot, especially, if you’re relying solely on Companies House data.

Filed accounts are great for looking at long-term trends but they’re likely to be well out of date by the time you look at them as they’re only filed once a year.

Therefore, you need to look for other clues as to what might be happening behind the scenes. For example, try to work out what the profit margin of your client’s business is likely to be and then look for other evidence of what might be happening to profits.

For example, if market conditions are tough, sales are likely to be declining. If the price of raw materials is going up, costs are going to increase. Fluctuations in currency exchange rates due to political or economic uncertainty can also have a big impact on profits if there’s an international element to your client’s business.

Any of these scenarios can eat into a company’s profits and tip the balance to negative cash flow, leading to financial problems.

Declining reputation and market share

How many big names and long established businesses have we seen disappear because they struggle to adapt to a changing marketplace? It seems to be happening more and more and it’s a real risk if you’re a supplier to these businesses.

The bigger the company, the easier this is to spot, but even with smaller companies there are always warning signs. Keep an eye on the press and social media to see what people are saying about a business.

People can be very vocal on social media if they’re unhappy with a service, or if it’s no longer in vogue. Look out for these comments.  If you see comparisons such as “Company X doesn’t have the same product range as Company Y” it could be a sign the business is losing touch with what its customers want.

As a result, their reputations and market share can decline, leading to financial difficulties and the increased risk that they won’t be able to pay you on time.

Company becomes more contentious

If a company is fighting for its survival, it will try to find any excuse for not paying you. You may find your client raising spurious complaints about your services or querying your invoices for no good reason at all. All they’re trying to do is delay payment, get a discount or even avoid payment all together to ease their cashflow problems.

If you take a tough stance with these clients they will usually pay up because they will have more than enough on their plate to deal with. They won’t want to get involved with disputes they cannot win and which will cost them even more in the long run.

To finish this article, there are three key points I would like you to keep in mind at all times:

  1. The earlier you spot a problem, the easier it is to deal with

Late payment is no different, so if you spot any of these five warning signs, take action as soon as possible.

  1. Don’t let problems escalate

If you have outstanding invoices, don’t allow your clients to get further and further into debt. If your client is paying late they will be in breach of contract so this may give you the right to suspend your services or terminate the contract all together.

  1. Keep your emotions aside

Remember, your priority is to get paid as much as you can as quickly as you can. When a company is in financial trouble, problems can escalate quickly, so be realistic and accept that sometimes, taking a reduced amount now could be a better option than hanging on for full payment later, which never arrives.

For more information about dealing with late payments or recovering your unpaid invoices, please see my previous article: An effective guide to tackling unpaid invoices.

If you have any other questions about recovering your unpaid invoices or dealing with clients in financial trouble please feel free to email me at editors@businessadvice.co.uk.

Read more advice from David Walker:

  1. A guide to resolving family business disputes
  2. An essential checklist for setting up a family business
  3. Advertising law: Our legal expert answers your questions
  4. Hot to stop business disputes becoming personal

Sign up to our newsletter to get the latest from Business Advice.


 
TAGS:

ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

Q&A

If you’ve found the article above useful, but have a more detailed and bespoke question, then please feel free to submit a query to our expert. We at Business Advice will get in contact with them on your behalf and arrange for a personalised response. These questions and answers will then be collated on the site for any other readers who have similar queries.

Ask a question

From the top

Find out how KPMG Small Business Accounting can really work for you

FIND OUT MORE