Businesses often face the challenge of managing bad debt, especially when clients in their accounts receivable start showing signs of financial distress. In this insightful message from Dave at AFX Search, licensed investigators, we’ll explore key indicators and proactive measures to help businesses anticipate and protect themselves from accumulating substantial bad debt.
Recognizing Early Signs of Client Distress
The first step in safeguarding your business is to be vigilant about potential signs of trouble with your clients. Dave outlines some indicators that may signal financial distress:
- Delinquent Payments: Monitor the payment behavior of your clients. A significant increase in payment delays, with 30-day invoices stretching to two or three months, is a red flag.
- Excuses for Delays: If clients are offering frequent excuses for payment delays, it may indicate a deeper issue.
- Volume Clients: Businesses with significant revenue from specific clients need to be especially cautious. It’s crucial to catch signs of distress early for these major contributors.
Conducting Investigations: How to Catch Distress in Advance
- Check for New Checking Accounts: A change in checking accounts could suggest an attempt to separate incoming funds from bill payments. Investigate if there’s been a switch to a new checking account.
- Verify Address Changes: A change in physical address on invoices may indicate changes in the company’s structure or financial health.
- Employee Changes: Layoffs and changes in key personnel can be indicators of financial difficulties within a company.
- Public Records Check: Regularly check public records for company principals, general managers, and corporate officers. Look for liens, judgments, or notices of default on personal homes.
Proactive Audits: A Strategic Approach
To stay ahead of potential bad debt issues, Dave suggests implementing a proactive audit strategy based on the percentage of revenue a client represents:
- 10% or Greater: Conduct an annual audit.
- 15% or Greater: Consider a semi-annual audit every six months.
- 20% or Greater: Opt for a quarterly audit to closely monitor the client’s financial health.
While audits add to operational expenses, they serve as a crucial preventive measure, preventing businesses from becoming financially distressed themselves.
Final Thoughts: Safeguard Your Business with Knowledge
By staying informed and proactive, businesses can protect themselves from the adverse effects of bad debt. Recognizing early warning signs and implementing regular audits, particularly for high-volume clients, can make a significant difference in financial stability.
If you have further questions or need assistance with these audits, AFX Search’s team of licensed investigators is ready to help. Visit our website at afxsearch.com to learn more about our services and how we can contribute to the financial health of your business.