7 Simple Signs Your Supplier is in Financial Distress

Over the past several weeks, insolvency and companies facing severe cash flow issues have hit the headlines. Carillion announced their liquidation in early 2018, becoming the largest insolvency procedure of the year. Quickly following suit, Toys R Us and Maplin announced their failure to negotiate payments with creditors, and both retail companies have now entered the administration process. Only several weeks later, New Look, announced plans to close 60 stores as part of their CVA, with agreements in place with their creditors. Similarly, Grainger Games closed all 67 of their stores abruptly, as multiple investors pulled their credit offerings.

The recent headlines have only highlighted the necessity of carefully analysing your cash flow, and that of your clients. While it’s not always clear if a client is failing, there are several signs indicating a company’s financial health. The warning signs act as evidence of potential trouble. Business Rescue Expert, leading insolvency practitioners in the UK, are sharing the indicators your clients may be in financial distress.

1. Poor communication

Poor communication is a significant indication of financial distress. Should your clients no longer return calls or answer emails, it is a strong indication that something is not right. If you happened to enjoy an amicable business relationship, yet cannot get in touch with management regarding invoices - you should look into formal proceedings.

Alternatively, look to see how the company corresponds when you do get hold of senior management. If their tone is more formal than previous, it could signify they are undertaking legal proceedings and, possibly, looking for alleged breaches of contract.

2. Disputing invoices

Further to the above point, your clients may attempt to avoid payment by raising invoice disputes. These disputes could relate to issues with performance, stock etc. and could be an attempt to shed unprofitable contracts to save payments. Again, the tone of their correspondence could suggest something is wrong with your clients, and they could be preparing a trail of evidence. Disputing their invoices also provides the company with a little breathing time, so you should be wary of clients disputing invoices where there doesn’t appear to be clear issues.

3. Loss of reputation

Reputation is critical to the success of business. A fall in reputation - especially when it comes to payment - should set off several alarms. If you hear the company is losing trust with other clients, it’s time to sit down and get to the root cause of their issues. A huge loss in reputation can often prove irreversible, as it takes time and investment to gain back consumers trust.

Toys R Us is a prime example of a company losing reputation. Initially, Toys R Us entered a CVA, but failed to pay the debts owed at the time agreed. Subsequently, the damage of their reputation with creditors led to them entering administration.

4. Relaunch and rebranding

You should always be wary of companies rebranding every so often, under similar names. Alarm bells should ring as to why they have had to sell and rebrand previously. Is the rebrand just plastering over the initial cracks of the cash flow issues? Likewise, if a company relaunches yet offers the same trade to their consumers, without any extra income, it’s more than likely they will continue to face the same problems. In the worst case, your company could suffer a loss of reputation due to the association.

5. Low staff morale

Staff mean the difference between success and failure, and companies should always take care of their workforce. A company who doesn’t and boasts a massive turn around is instant trouble, and a huge indicator of potential cash flow issues. More often than not, staff will get a feel for cash flow issues before creditors - particularly those within the sale team. If there happens to be a feel of unease, or a high number of resignations, you can expect cash flow issues are at the heart.

6. Senior staff resignations

A sharp indicator of what is to come is senior staff resignations. If directors are leaving the sinking ship, you need to ask why. Likewise, if directors are under investigation, something is very wrong with the company. If those in charge of the company’s finances have resigned, it may be as this is their only option. We urge you to take note of these departures and, if it continues, seek immediate advice.

7. Clients refusing to trade with the company

If you have spotted any of these signs with your clients, you must speak to professionals immediately to discuss your options. We suggest attempting to communicate with your client to establish the cause and, perhaps, set out a payment plan. You can also track their company progress or obtain accounts through Companies House.