Ten Red Flags that Signal Financial Distress in Business Customers

Five years after the onset of the COVID-19 pandemic, many businesses are still in recovery, e.g., contractors from continuing disruption in their materials supply chains, cinemas still trying to lure back moviegoers, and department stores competing with online shopping. In fact, business bankruptcy filings have been rising in recent years, pushed up by higher interest rates and inflation. Whether the business is a customer, supplier, or borrower, evaluating its financial health is essential to maintaining a satisfactory relationship with the firm. This session offers ten red flags to identify ailing firms before they file for bankruptcy protection.

After attending this presentation, participants will be able to

• Identify ten red flags for identifying, evaluating, and  monitoring financial distress
  • 1-ailing industry
  • 2-declining financial condition and operating performance
    • decreasing sales, gross profit margins, net profits
    • shrinking liquidity, rising leverage, eroding solvency
  • 3-organizational volatility
    • management and director turnover
    • employee layoffs
  • 4-professional changes
    • Law firm
    • Accounting firm
    • Insurance agent
  • 5-asset disposition
  • 6-change in ownership
  • 7-credit deterioration
    • COD terms, judgments, liens
    • Overdrafts, default, foreclosure
  • 8-declining communication
  • 9-major casualty loss from weather-climate elements—fire, flood, etc.
  • 10-negative media coverage—complaints, poor online product-service  reviews, lawsuits, arrests
• Understand the interconnections among these red flags, e.g., change in ownership and management, employee turnover, declining liquidity, and slower trade payments
• Take appropriate action to mitigate any adverse impact from potential failure.

Attendees will benefit from this presentation’s relevance and timeliness:

• These red flags warrant close attention and force participants to understand that their organization’s relationships with its own suppliers and customers open them to possible losses from above and below
• The continuing volatility and uncertainty in the economy necessitate that creditors and lenders evaluate a borrower’s depth and breadth of its supply chain—quality and quantity of goods and services substitutes, reliability of alternate suppliers, trade credit costs, modes of transportation, delivery times, etc.
• The suggested red flags are likely to get bankers and suppliers thinking of other distress indicators to monitor and improve the ability to avoid, lessen, and prevent credit losses before bankruptcy is declared.