Many businesses will have time and money invested in contracts with suppliers and customers. Due to challenging economic times, one party may cease to perform, get into financial difficulties or enter into an insolvency process. By the time your counter party is near to insolvency you may well have limited options. Acting early can lead to better outcomes such as saving significant time and cost, helping preserve relationships and protecting your brand. How do you stay ahead of the game?

If there is one takeaway, it can be summarised by the moral of this story:

In the USA, a man parked his car in a hotel car park during the 4 July weekend. He checked out on the morning of 5 July and his car was not there. He thought it had been stolen. Imagine how he felt. He contacted security. His car had been towed away because the hotel needed the car parking space for a special event, fireworks. The hotel had not left any information in guests rooms telling them that was going to happen. The result was a dissatisfied customer and a critical online review about the hotel's left hand not talking to their right hand.

The "left hand right not talking to the right hand problem" happens in all sorts of organisations.

Your business may have many touchpoints with your counterparty. These may include any procurement team, those in the business that negotiated the original contract, an in-house lawyer, the contract or relationship manager, those who deliver (or receive) goods or services, your finance team etc. Sometimes the volume of information can be difficult for business to assimilate into one place, especially in a larger organisation. The key strategy to identifying and managing the risk of a failing supplier or customer is to:

  • Identify the touchpoints with your supplier or customer
  • Have clear and tested internal communication lines so that information can be shared swiftly and effectively.

A joined up decision can then be taken as to the best way forward.

When gathering information, some of it will be hard data, other will be soft. The most effective organisations use both. Here are our top tips:

  • Online, you can freely obtain a company's accounts filed at Companies House. Compare the last few years accounts:
    • The balance sheet will give a snapshot of the company's assets and liabilities. The key metric is total assets less current liabilities. This is one of the tests of solvency
    • In terms of fixed assets, check whether the company has disposed of any property in the previous 12 months and if it has whether it uses the proceeds to reduce trade creditors. That could imply cash flow difficulties
    • In terms of the company's current asset position, if stock levels have risen year on year, it may be a sign of declining sales
    • Check if the debtor level has risen. If it has, there is a higher chance that the company has bad debts which it cannot recover
    • Check whether the overdraft liability has risen. This may indicate that insufficient cash is being generated from regular trading
    • The profit and loss account will show the company's gross and net profit. Has gross profit or operating profits fallen? (A reduction in operating profit will mean that the company has less cash available and may therefore be less resilient).

The late filing of accounts might be a sign of financial difficulties.

There is a limit to how valuable accounts are. They may be out of date. If they are abbreviated accounts, they are unlikely to contain much useful information.

  • At Companies House, check whether there is a recently registered charge. If there is, the charge may have eroded the equity on the charged assets. (Unless perhaps the company has also released any prior security which will be shown as satisfied on the mortgage register)
  • Check to see if any Directors have recently resigned or been appointed. This information will be contained in the Directors' Report together with any subsequent resignations showing on the Companies House Register. Sometimes Directors desert what they perceive to be a sinking ship
  • You can check with the Companies Court whether a winding-up petition has been presented in England and Wales (telephone number 0906 754 0043). In addition, the London Gazette publishes all public notices relating to corporate and personal insolvency in England and Wales (eg Notices of the appointment of Administrators or advertisements of winding up petitions)
  • Check whether there are any unsatisfied county court judgments (CCJs). Sometimes this can be an organisational problem , especially in a larger business (eg the claim form was served at an outpost and didn’t come to the relevant person's attention until too late). An unsatisfied CCJ can however be a sign that something more serious is amiss
  • Is the company missing any Key Performance Indicators? Eg is delivery of goods or services irregular?
  • Has the company rebranded recently? If it has, is the rebranding cosmetic (designed to mask more serious problems) or is it genuinely raising financial performance?
  • Is the company taking longer to pay you or exceeding credit terms? Calls going unanswered, or concerns being raised about invoices or delivery that don't seem to be genuine can sometimes be a sign that the company has cash flow problems
  • You should keep in touch with the company's employees. Has there been any detectable fall in staff morale? Sometimes employees at the coal face have a reasonable insight into the state of their business
  • Are you aware of any other suppliers who have switched off their supply? Word of that tends to spread
  • Are there any articles in the press about the performance, re-financing or poor trading? Trade press can be a useful source of information.

Spotting the warning signs and sharing that effectively within your organisation are the first important steps to identifying and managing risk. We will look at what can be done with that information to reduce your risk and best protect your position in a separate article.