Minding your own business:
4 customer situations to watch out for

Providing goods and services on credit to customers will always be associated with a level of risk, that of late or non-payment, or even the possibility of insolvency. As a result, business owners will need to pay close attention to who they on-board as clients, as well as monitor their current customer base. Dun & Bradstreet's Director of Corporate Affairs, Danielle Woods, talks through four customer situations that business owners need to watch out for.

Large orders

An increase in the volume of orders from a customer may signal improved financial conditions, but can also be debt traps for companies which they do business with. Until the money is in the door there is always the risk that the customer will not pay at all or fall over, posing a significant risk for small business cash flow. To mitigate this risk, business owners will need to stay informed on a customer's financial background and payment history when they take on a huge order or extend credit to companies who seem to be expanding at face value.

Slow payers

The average time Australian firms take to pay their bills stands at 52 days  in the December quarter, significantly over standard 30-day payment terms and only five days lower than payment times during the Global Financial Crisis. This is a worrying fact as it means businesses aren't getting the money owed to them for more than seven weeks as cash is tied up in the accounts receivable process, which in turn affects their ability to pay their own bills.

Slow payers have a huge impact on business cash flow, so it's important that firms closely analyse their customers' payment patterns before taking them on as a customer. Depending on the payment patterns of a business, you may want to increase or lower the amount of credit extended and your payment terms.

Customers who don't pay

Customers who don't pay are worse than customers who pay late, as it means you're not getting the money at all for goods and services rendered - in effect this means that the customer is walking away with free goods. It also means that you have probably spent significant time and effort chasing up the debt and may have to write-off the amount as bad debt. Again, staying up-to-date on customer payment patterns will enable you to better predict future outcomes - and combined with financials and demographic data (such as the age of the business and the number of employees) - it should improve your ability to assess the likelihood of non-payment.

Registering security interests on the national Personal Property Security Register (PPSR) is also a good way to safeguard your business in the case your customer falls insolvent. Read more on PPSR >>

New customers

Most small businesses are enthusiastic about winning new customers, but it's equally important to be aware of the risks. You should always conduct a credit check on new customers to verify they are who they say they are and not, for instance, a fraudulent or previously bankrupt company. A credit check can also confirm a business's existence, predict financial stability and provide information on legal and bankruptcy records. It can also find out if any of its directors have been previously bankrupt or on the board of a previously insolvent company.

Taking on new customers or new orders can be as risky as it is rewarding, but by taking the essential measures to protect your business, you'll be able to ensure that any customer decision you make will be an informed one.

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