Early Warning Signs of Customer Financial Distress

By Michael C. Dennis

Recognizing the early warning signs of customer financial difficulty is crucial for businesses to mitigate potential losses and maintain healthy cash flow. By proactively identifying these risk flags, companies can take appropriate action.  Here are some key risk flags that suggest a customer may be experiencing serious financial difficulties:

• A bankruptcy filing.
• Changes in key personnel (especially financial management).
• Consistently missing payment deadlines or requesting extensions.
• Decreased communication frequency or avoiding contact.
• Deteriorating credit rating or negative credit reports.
• Disputes over invoices or billing discrepancies increasing.
• Difficulty providing updated financial statements when requested.
• Frequent changes in banking relationships.
• Increased negative online reviews.
• Inconsistent order patterns or sudden large decreases in orders.
• Industry downturn or significant changes in market conditions.
• Legal actions or lawsuits filed against the customer.
• Loss of major clients or key contracts by the customer.
• Negative news articles or media coverage about the customer.
• New aggressive cost-cutting measures or downsizing activities.
• Noticeable decline in the quality of products or services.
• Public announcement of restructuring or reorganization plans.
• Requests for unusual payment terms or methods.
• Rumors of financial difficulties.
• Significant changes in business strategy or operating model.
• Significant increase in customer debt-to-equity ratio.
• Sudden changes in ownership or management structure.
• Unusual or complex transactions that lack clear business purpose.
• Website updates cease or social media presence becomes inactive.

By diligently monitoring these indicators, businesses can proactively manage credit risk, minimize potential bad debts, and maintain strong financial health.