How to spot financial distress among your suppliers

As supply chains struggle with the COVID-19 pandemic, watch out for these red flags.

by Will Green
Last Updated: 31 Mar 2020

Firms are being warned to be on the lookout for signs of financial distress as the coronavirus disrupts supply chains.

Simon Underwood, a business recovery partner at accountancy firm Menzies, said firms unable to follow government guidance that employees work from home – such as those in the retail, hospitality and leisure sectors – were facing “significant disruption” and “high levels of financial stress”.

In a blog for Supply Management Underwood said companies should watch for “financial red flags”, including difficulty paying creditors or employees on time and sudden changes in communication patterns with key customers.

“By recognising and reacting quickly to financial red flags, companies may be able to relieve some of the immediate pressure on cash flow and maintain business continuity through the crisis,” he said.

“If it is becoming increasingly difficult to pay creditors or employees on time for example, this could be a sign that there may not be enough cash in the bank to weather the storm.

“Another important indicator of financial trouble ahead could be sudden changes in communication patterns with key customers, and if payments are delayed, this could have a significant impact on cash flow.”

Underwood’s comments come as RapidRatings, a firm which provides analysis on the financial health of firms, estimates firms in China, Korea and Italy make up around 12 per cent of a typical global company’s tier one supply base.

In a report RapidRatings said: “It is a daunting time for organisations around the world assessing the impacts to their businesses and many have ‘war rooms’ established and tremendous resources allocated to triage, for example, identifying risks, formulating mitigation strategies and adjusting supply chains and business strategy accordingly.”

Underwood recommended implementing a strong credit management strategy, calling in debts, and talking to creditors to extend payment terms.

“In these extremely challenging times, businesses should remember the adage that ‘cash is king’ and make cash management a primary focus,” he said.

“Implementing a strong credit management strategy and calling in debts where it is possible to do so could help to ease pressure on cash flow.

“Over the course of the next few months, it may also be necessary to talk to creditors about extending payment terms. Once promises have been made, it is important to stick to them. This will build trust, helping the business in the event that a similar conversation is held in the future.”

This article was originally published on our sister title Supply Management

Image credit: CBS/Getty Images

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