For years clients have always asked how we can accurately predict a company collapse and advise our clients how to avoid loss. For me, after 13 years in the debt prevention field, it is simply a matter of reading data and understanding behaviour.
It is very rare for a company to be fine one day then liquidated the next. On the way down, there are potential tipping points that indicate danger, which we can observe and use to position and protect our clients. I’ve outlined a few of these below.
Now in itself, switching a supplier is not a big deal. The original supplier could have raised prices, stopped providing a particular line or product, or there could be a competitor eroding the supplier’s market share.
Another reason could be that the company and the supplier have a relationship outside of business and the company is trying to insulate the supplier against an upcoming insolvency event. Or perhaps they are outside of agreed payment terms and have been cut off by the supplier.
Once you know why the change has been made, its importance can be understood. Having a credit monitoring facility that can send you the alerts of new accounts being opened can at least start the dialogue.
This is especially important when a company switches from a long-standing supplier to a new one that is either geographically further away from the company or if they go from 20th of the following month payment terms to a cash account or prepaid arrangement, as this would make no business sense other than absolute necessity.
Staff layoffs / mass exodus
This one is a biggie. When multiple strategic or management staff members leave at the same time it is normally for one of two reasons. 1). Strategic head hunting from a competitor, or 2). They know something you don’t. Crew do not tend to jump off a ship that is watertight.
If someone’s job is to grow and nurture a business, yet they seem keen to be as far away from it as possible ask why. Sometimes a phone call to the ex staff member will go a long way to understanding the situation much better.
Entity / bank account changes
When a company is about to go under (especially in construction) the director (s) will often begin setting up for the future and their next venture.
Monitoring the NZ Companies Office for new companies with the same shareholders/ director/s could give an indication of what comes next.
Lately we have found that immediately before a collapse, some companies will change the accounts receivable bank account to fund the new entity, or divert funds away from the liquidator.
A major change to watch out for when watching Companies Office changes are alterations that rename the company away from its trading activity – eg, from Bob’s Building and Haberdashery Ltd to Bob’s Holding Company 2019 Ltd.
In my experience, the reason for this in an attempt to limit brand and repetitional damage that could occur by the legal entity being listed in the paper or Gazette.
Increase in disputes
A major warning sign of an insolvent or struggling company is a marked increase in the amount of disputed or delayed payments.
In my experience, if a dispute doesn’t arise between the work being done and the invoice going out, the validity of the claim drops by at least half as the dispute seems to be a reaction to the arrival of the invoice, not the work performed.
If a company disputes an account, give them seven days to fully outline the alleged dispute and if not sorted lodge it immediately with the Disputes Tribunal.
Disputes are commonly used as delaying tactics – call the debtor’s bluff and often times the invalid dispute will go away. Lying on email is one thing, lying in a courthouse is quite another.
These are just a few things to watch out for and there are automated tools that can watch out for many such behaviours and alert you if any of these warning signs are occurring.
If you have a strong documentation foundation, a good debt prevention system and good old-fashioned common sense, then loss is avoidable or at least can be mitigated.
Just a thought