Only 3% of Businesses Accurately Spot Financial Red Flags When Assessing Customer Risk, Reveals Creditsafe Study
2024 was a milestone year for corporate bankruptcies, with well-known brands like Express, Joann, Red Lobster and TGI Friday’s filing for bankruptcy. The reality is that several factors contributed to the downfall of these companies, including declining sales, high debt loads, increasing costs and cash flow issues. The reality is that erratic payment practices are often highly indicative of cash flow issues and financial distress. But the ‘Cost of Late Payments’ study released by Creditsafe reveals that few businesses know how to spot the red flags or identify which risk patterns are indicative of cash flow issues.
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The good news is that 86% of the respondents believe frequent or increasing late payments from customers over a 12-month period has a moderate to high impact on the likelihood that a customer will go out of business or file for bankruptcy. This suggests that businesses are becoming more aware of the correlation between payment behaviors and bankruptcy risk. But there is one major problem. Only 3% of businesses are accurately spotting the real signs of trouble when analyzing the payment behaviors of their customers despite historical data showing that sudden shifts in payment behavior often precede bankruptcy.
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Key findings from the report include:
- Overdue invoiced sales are a serious drain on monthly cash flow. According to the study’s findings, 86% of businesses reported that up to 30% of their monthly invoiced sales are overdue. On top of this, 66% of the respondents said they’re typically waiting for overdue payments from customers – totaling up to $70,000 each month.
- Bad debt poses a risk to a significant minority of businesses. Nearly one-third (32%) of businesses reported losing between 5% and 30% of their annual revenue to bad debt – with 16% losing 5-10% of their revenue and another 16% losing 11-30% of their revenue.
- Lure of revenue often overshadows critical need for financial due diligence. Our study found that 61% of businesses don’t always analyze a potential customer’s historical trade payments and late payment trends before signing a contract with them. Of the 61% of businesses that don’t take financial risk analysis seriously, 17% said they either rarely or never do so, while another 17% said they only do it sometimes.
- Businesses prioritize strategic customer relationships over rigid payment timelines. As our study reveals, finance teams can end up spending quite a lot of time chasing customers to pay overdue invoices. For instance, 81% of the respondents said they typically chase a customer between one and four times just to get a single overdue invoice paid. Given how many attempts it takes to chase customers for unpaid invoices, we were surprised to see that 29% of businesses were willing to wait between 31 and 60 days for a customer to pay $50,000 in overdue invoices.
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Steve Carpenter, Chief Operating Officer for North America at Creditsafe, says, “Our study’s findings highlight the need to educate – or re-educate – finance teams on how they can properly identify red flags when assessing the financial health of their customers. It’s not just about why it’s important to regularly review and analyze the historical trade payment data of customers. While that’s very important, it’s also necessary to provide helpful tips and training so finance teams can accurately identify problematic patterns that are indicative of cash flow issues and an increased likelihood of late payments over time. Otherwise, businesses will continue to miss and misread clear red flags – costing them dearly in terms of the amount of time it takes to chase unpaid invoices and the negative impact it has on the bottom line.”
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source – businesswire
