Beware the domino effect of bad business debt
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Deborah, from the Sheffield office of business turnaround and insolvency practice Leonard Curtis, points out that even the most stable business can be affected by issues further down the supply chain which create a domino effect of bad debt.
“We have worked with companies who have done absolutely everything right and have taken every possible measure to protect themselves, ensuring that their customers pay on time and that they have no debt,” she explained.
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Hide Ad“Only recently we dealt with a company that was trading at about £1 million per month and were being paid on time, so everything looked settled and secure.
“But when their main contractor had a contract terminated that failure filtered through, work was stopped without notice and things very quickly started to fall apart.
“They had vehicles on lease and employees engaged with no work to do and immediately, from being a company that was very profitable, they were suddenly faced with the potential for insolvency even though they appeared to have done everything correctly.”
The problem, Deborah added, was that the company had become too dependent on the one client.
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Hide AdIn the face of their sudden change of fortune, all they could do was dip into their reserves, review their position and begin a search for new customers to fill the void left by the loss of business.
“Often companies will credit score their customers but what about those customers’ customers?” she asked.
“The problem could be two or three times removed from you but when that problem happens overnight, it is easy to be sucked into the spiral of non-payment.
“That’s why companies and directors must make sure that they are always in the best possible position to be able to react swiftly to this kind of situation.
“If they are unable to respond, they might find themselves in a position where decisions are taken out of their hands.”