Financial Health Monitoring to Minimise Bad Debts

One of the most critical and challenging things for businesses is managing financial risks. It doesn’t matter what size the business is, growth and profitability goals can all too easily be derailed by bad debts. But what can you do to safeguard your company against financial risks and be proactive in making sure any clients you take on aren’t going to be a problem later down the line. One of the ways you can do this is through financial health monitoring.

What is Financial Health Monitoring?

There are a lot of things that make a company tick, but their financial health is one of the biggest factors. This doesn’t just mean the number in their bank account, but their assets, debts, payment histories and all sorts of other things. A company in good health will be turning over a good profit every year and be free of massive debts or other operating issues, which means they’re able to pay your invoices on time, every time.

That’s why financial health monitoring exists. It’s a way of understanding and measuring how healthy a company is. This can be an important factor when deciding if you want to work with a new business, especially if you’ll be extending a line of credit to them. You want to be sure that you won’t be left out of pocket by it.

When you monitor the financial health of a client, you’re looking at 4 key things:

• Liquidity
• Solvency
• Operating efficiency
• Profitability

These elements give you an insight into the amount of cash and assets a company has, their ability to meet debt obligations, their operating margin and their net profitability. Since no single metric can give you an accurate view of the overall financial health of a company, we use all of these together to paint a bigger picture.

Ultimately, financial health monitoring is all about being proactive about who you work with, so that you can protect yourself against future bad debts.

How to Spot a Good Business

While you’re digging around for information, there is plenty you’ll come up with. Some of it will be good, some not so good. Almost every business has some blips in the road, so it’s important not to tar them all with the same brush. Instead, look out for some of the key indicators that show whether a new client is likely to be solid and reliable, or a bit of a risk.

Nine Signs of a Reliable, Creditworthy Business:

• Consistent payment history
• Stable financial statements
• Low debt-to-enquiry ratio
• Positive industry reputation
• Transparent communication
• Strong relationships with suppliers
• Consistent cash flow
• Demonstrated risk management
• Proactive credit management

Nine Signs that Point to Trouble:

• Late payments, or failing to pay invoices at all
• Renegotiation requests or changes to payment terms
• Word-of-mouth concerns
• Official announcements detailing financial performance
• Creditors issuing winding up petitions
• A sudden suspension of ongoing work
• Unsatisfied CCJs or any issued High Court Claims
• Delays in filing accounts or returns at Companies House
• Several key members of the contractor’s project team left simultaneously

Being able to spot these signs as early as possible can place a business in a much more favourable position when you’re assessing a client’s creditworthiness to avoid bad debts. Financial health monitoring means you can see the warning signs that your client might be in trouble before they become real problems, giving you time to intervene, or to prepare yourself. You can even be proactive and reach out with alternate payment plans or arrangements, so that the difficulty doesn’t impact either of you. You can even provide personalised advice and support, which they will likely be pleased to take. Ultimately, by keeping an eye on this information you can build a stronger relationship with your clients and protect your business at the same time.

Of course, a lot of this is tricky to do by yourself, especially if you don’t know where to look. That’s where we can help. At Debtcol we work closely with businesses of all shapes and sizes and in all industries, helping them not only collect outstanding debts, but to monitor the financial health of their clients and prospects. We can do this on a one-off basis or ongoing, allowing you to predict if a client is struggling and be proactive. If you’d like to know more, just get in touch with the team today.