Credit-to-cash briefing
Checklist: Early detection of fault risks
Insolvencies often happen when an important business partner folds. Particularly small
and medium-sized enterprises with capital ratios of less than 20% can fall victim to thisdomino effect. They find it difficult to weather losses caused by a customer’s insolvency
and can fast end up in dire straits, with liquidity constraints threatening their very
existence.
However, businesses almost never go into insolvency
over night. Therefore, a timely identification of vital
factors is indispensable to protect oneself.

This checklist typifies the most important indicators
you should monitor. It thus enables you to adapt yourbusiness policy

A 100% accurate prognosis is hardly possible. It is notuncommon for companies to be successful despite
showing negative indicators.

accordingly. The credit risk goes up with the numberof indicators that are fulfilled. And uncertainty
grows with the questions that do not lead to concreteanswers (n.i. =no input.).

On the other hand, it is not uncommon for businesses
that in the past did not show unfavourable signs tofile for insolvency. But practical experience showsthat the chance for a future insolvency will growwith the number of negative characteristics andindicators.

Credit-to-Cash Briefing

Checklist: Early detection of default risks
Payment behaviour
A customer with a bad payment record is an unmistakable early warning sign, particularly if negative changes occur. Be
sure to adapt your terms of payment and security measures accordingly.
Keep close tabs on the following indicators:

YESNON.I.

Does your customer frequently fail to pay on due dates?
Do they permanently take advantage of the full credit lines you have granted?
Have constant reminder notices been necessary of late?
Does your customer at times ask you to prolong overdue bills?
Has your customer suddenly changed the bank?
Has your business partner offered bills of exchange when invoices become overdue?
Have cheques recently been returned unpaid or bill of exchange dishonoured?
Were insufficient funds in the account when debited?
Did unwarranted rescission of direct debit authorisations occur?

Senior management
Particularly the management of small and medium-sized businesses often lacks the relevant expertise to generate asustainable level of profit. You should closely monitor the following potential weak points in the senior level:
Qualification:
Particularly the management of small and medium-sized businesses often lacks the relevant
expertise to generate a sustainable level of profit. You should closely monitor the following potential
weak points in the senior level:

YES

NO

N.I.

YES

NO

N.I.

Insufficient management expertise?
Lacking experience in the relevant sector?
Lopsided technological orientation?
Rather unrealistic business planning?
Human resource problems
Particularly the management of small and medium-sized businesses often lacks the relevant
expertise to generate a sustainable level of profit. You should closely monitor the following potential
weak points in the senior level:
Have there been problems with the issue of succession?
Was there a frequent change of partners in the past?
Is there a high turnover among senior management?
In your eyes, has the senior management made errors in assessing situations and developments inthe recent past?

Credit-to-Cash BriefingChecklist: Early detection of default risks
Financing
Return on sales is often at a low level. Therefore, adequate liquidity and financing capacity are crucial. Moreover, Basel II
now obliges companies to commit themselves to an optimal financing scheme.
Capital structure
The risk of insolvency rises with unfavourable figures, in particular:

YESNO

N.I.

YESNO

N.I.

Do you perceive your customer’s equity capital to be insufficient?
Is there a marked reluctance to increase their equity capital?
Do you believe the debt level to be overly high?
Are there high loss carry forwards on the balance sheet?
Does the interest to sales ratio exceed the sector’s average?
Are fixed assets predominantly short-term financed?
Internal financing
Is the rate of return on capital employed too low?

Accounting
More than in other areas, weak spots in the accounting department can lead to grave financial problems. Moreover, anaccounting that is flawed and not based on the latest data is often the reason that a company’s management fails to identify
serious problems in time.
Collections

YESNO

N.I.

YESNO

N.I.

YESNON.I.

Do you believe that your customer has a flawed collections management?
Every delay in time costs money. If collection services fail to operate inefficiently, DSO(days of sales outstanding) ratios are high and cut profits because of increased financing costs.

Invoicing / billing
Are invoices regularly sent out too late or do they often hold mistakes?
Unnecessarily late invoicing implies additional need for financing as customers are kept from making timely payments.

Financial, cost and liquidity planningDo you find that financial, cost and liquidity planning are unsatisfactory?
An adequate planning process is precondition for responsible corporate management.
Without it, the possibility of financial problems occurring is definitely higher.

Credit-to-Cash Briefing

Checklist: Early detection of default risks
Procurement
Your customers’ procurement policies allow you to draw important conclusions as to their creditworthiness.
Dependence

YESNO

N.I.

YESNO

N.I.

YESNO

N.I.

YESNO

N.I.

YESNO

N.I.

Does the company depend on too few suppliers?
Depending on only few suppliers can be potentially dangerous. If one of them should file for insolvency or experience
difficulties in delivering ordered goods, the buyer, i.e. your customer, might face a predicament.

Suspension of deliveries or immediate collection by other suppliers
Have you been informed of suspension of deliveries or immediate collection by other suppliers?
Caution is advised should you be informed to that effect. Payment problems or lacking lines of credit with credit insurers orfactoring institutions might be the reason.

Recurring change of suppliers
Have you found out that your business partner often changes suppliers?
This can imply problematic relationships with suppliers.

Complaints
Has your customer made unwarranted complaints?
Repeated complaints that turn out to be unwarranted or based on mere trifles are usually used as a pretext to delay
payments.

Ordered quantities
Have there been extreme changes in ordered quantities?
A decline in ordered quantities can in certain cases indicate a decline in sales and a sharp increase in ordered quantities
might indicate that a customer has stopped receiving goods from other suppliers. Furthermore, fraudulent ordering can bethe reason for an unexpectedly large order.

Manufacturing
Critical weak points in the provision of goods and services can have serious financial implications for a company.
Stock on hand

YES

NO

N.I.

YESNO

N.I.

YESNO

N.I.

YESNO

N.I.

Are your customer’s stock levels comparably high?
A strong hike in stock on hand can indicate falling sales.

Production capacities
Does your customer have excess production capacities?
Facilities that do not operate at full capacity in most cases imply sales problems. This also has an adverse
effect on the cost structure.

Manufacturing facilities
Are the manufacturing facilities in a bad shape?
Poorly maintained facilities as well as lack of investments into new fixed assets or the replacement of old ones may
indicate a deficit of funds. The closure of complete product lines could be because of problems with the market. On theother hand, it might also signify a market-driven and sensible decision.

Product quality and product range
Do your customer’s competitors boast superior product quality / product range?
If competitors are superior in both product quality and product range, this can suggest a flawed product management aswell as not adequately qualified senior management levels.
In the medium term, this carries a particular risk of insolvency.

Credit-to-Cash Briefing

Checklist: Early detection of default risks
Sales
Sales and turnover are decisive factors in securing a company’s financial standing. Negative developments can lead toinsolvency within only a short period of time
Customer structure and credit rating

YESNO

N.I.

YESNO

N.I.

YESNO

N.I.

Do your clients depend on a few customers?
If yes, do these buyers have a rather low creditworthiness?
The risk that you have to file for insolvency due to bad debts is larger if your accounts receivable are dominated by only
few customers. In this case, the likelihood of having to deal with potentially dangerous situations is obviously higher.
Frequently the default of one major customer can already lead to the creditor’s insolvency. Therefore, it is advisable toclosely monitor your client’s customer base and – if possible – their buyers’ creditworthiness.

Market behaviour
Does your customer offer products or services at unusual prices?
In a desperate effort to raise cash, a customer’s “last stand” might be to resort to aggressive sales techniques,e.g. special offers with extremely high rebates.

Market development

Is there a greater competitive pressure on your client?

Do you believe that your customer fails to adapt adequately to market changes and innovative
customer demands?
Your customers’ market environment plays an important role. Unfavourable risk factors, e.g. a slump in sales, recession in
the relevant sector, as well as aggressive competitors need to be taken into account too when rating their creditworthiness.

You cannot always identify impending dangers. This makes it all the more important to prepare yourself for worst
case scenarios.
Atradius offers a range of comprehensive credit insurance solutions geared to protect you against bad debts in thefollowup of customer insolvencies. Please don’t hesitate to contact us. We will be glad to help you.

Disclaimer
This publication is provided for information purposes only and is not intended as a recommendation oradvice as to particular transactions, investments or strategies in any way to any reader. Readers must
make their own independent decisions, commercial or otherwise, regarding the information provided.
While we have made every attempt to ensure that the information contained in this publication has
been obtained from reliable sources, Atradius is not responsible for any errors or omissions, or forthe results obtained from the use of this information. All information in this publication is provided’as is’, with no guarantee of completeness, accuracy, timeliness or of the results obtained fromits use, and without warranty of any kind, express or implied. In no event will Atradius, its related
partnerships or corporations, or the partners, agents or employees thereof, be liable to you or anyone
else for any decision made or action taken in reliance on the information in this publication, or for any
consequential, special or similar damages, even if advised of the possibility of such damages.

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