Transport is a highly competitive industry with generally low margins – so every owner-operator in the transport sector will recognise the fear of falling behind with cashflow and building up debt.
Being unable to pay suppliers usually stems from customers or suppliers not paying your invoices. If these debts remain unpaid and you’re unable to recover the funds, it can have a serious knock-on effect on your own financial position.
These issues were laid bare in the recent Creditsafe Watchdog report, which tracks a wide range of financial indicators including levels of bad debt. It found that bad debt is a growing issue: during the second quarter of this year, unrecoverable debt owed to UK businesses rocketed by 39% to reach £220m.
Within the road transport sector specifically, the problem is also growing. Bad debt owed to road transport companies increased by 20%, from £2.7m in Q1 to £3.3m in Q2. There was also a more modest rise in bad debt owed by the road transport sector to others – creeping up 2% from £998k to just over £1m.
Reducing a business’ exposure to bad debt, and recognising the warning signs that a customer may be getting into difficulties, are clearly extremely important if you are to protect your cashflow. So, what are the warning signs to look out for?
Some of the signals are things you may pick up yourself, depending on how closely you work with the company. For example, if a lot of people seem to be leaving, there are tighter restrictions on budgets and spending decisions, or there are negative rumours about the company or bad press, you may begin questioning the relationship.
However, there are some more concrete things you can do to find out the facts – and one of these should be to obtain a credit report. This will provide you with a credit score for a company, but also a whole range of further information that will help you see how they are actually doing.
This would include:
- Adverse payment information. Check the payment information in the credit report (which will be based on shared trade payment data) for changes. Is the company’s average Days Beyond Terms (DBT) increasing? If it is, this means they are taking longer to pay their bills. Large companies that pay 70% of their invoices late are four times more likely to fail to pay than those who pay on time. Also check for any County Court Judgments (CCJs).
- Director information. Of course, directors change from time to time within a business, but if it seems to be becoming a pattern, or if a director isn’t replaced within a few months, it could be a sign that something is going wrong within the business. Also, check if any of the directors have a history of previous failures. Research shows that if a director has been involved with a collapsed business in the last three years, they are nine times more likely to fail again compared to a director who has never been involved with a failure.
- Enquiries spiking. The credit report should also contain information about the number of recent views. If this is on the rise, it might indicate that other organisations doing business with the company are worried as well.
- Linked businesses. Another valuable seam of information in a credit report is that it should give details of other companies within the Group Structure. Check those as well: if linked businesses have a poor credit score or are in difficulties, there is a danger that this could ripple out to affect other companies in the group too.
It’s also important that you don’t only do this once and then forget about it. Your relationship with suppliers and customers is ongoing and trading positions can change, so you need to monitor your customers and suppliers periodically and stay sensitive to market conditions.
The more encouraging news from the Watchdog report was that there was a 28% drop in the rate of transport company failures in the second quarter of 2017, down from 65 to 47. However, at the same time we also saw a 10% increase in those road transport companies considered a high credit risk (298) while those deemed a very high credit risk edged up by 1% (452).
All of this just underlines the need to know your customers and stay very alert to any signs of brewing payment trouble; and if you choose to ignore it, it will be your business that suffers. Ultimately, late payments will hit your cashflow and increase the likelihood of your company becoming a bad debtor too.
