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Why We Changed Our Scorecard

May 09, 2023 Red Flag Alert Updated On: October 5, 2023
Why We Changed Our Scorecard

Exciting news here at Red Flag Alert - we're proud to announce the rollout of all new scorecards across our platform.  

At Red Flag Alert, we're passionate about data and protecting our clients’ businesses with industry-leading analytics and insolvency scoring. These new scorecards represent the largest overhaul to our rating system that we have ever undertaken and mean that we can provide you with even more powerful and predictive business data. 

 But what is a scorecard? Why did we decide to change ours and what will that mean for you? We will answer these questions below. 

What is a scorecard?

To simplify, a scorecard can be thought of as the equation that a company’s data is put into to calculate their Red Flag Alert rating; therefore, by changing our scorecards we are changing how we calculate business risk. 

In practice, each scorecard is incredibly complex and the product of extensive research and analysis by our data scientists into what the predictors and signs of business distress and success are.

Why does Red Flag Alert use multiple scorecards?

The reason for this is that factors such as size, industry or location can have a significant effect on what the factors for business or distress are. For example, a multi-billion-pound turnover engineering firm operating across the globe is very different from a six-figure turnover single office of a local accountant. Clearly, these scenarios require different methods for judging their financial health.  

To continue this example, just because the accountant is much smaller and turning over less each year does not necessarily mean that it is less financially healthy and more of a risk than the larger company. By applying different scorecards relevant to each company, both can be given an accurate rating.

Why change scorecards?

The world has changed significantly since the start of 2020 and so have the challenges facing businesses and how businesses themselves operate. COVID and lockdowns saw a boom in digital businesses and a further decline of brick-and-mortar stores, whilst the ending of COVID restrictions saw many of the success stories of lockdown go on to fail themselves. Managing risk post pandemic has proven a tricky task and in addition to these changes in buying trends, companies have to deal with factors such as local and international supply chain issues, material shortages, inflation, rising cost and soaring energy prices. In short, the world is no longer the place it once was and whilst many hoped that after the pandemic it would return to being so, this will not happen.

 Here at Red Flag Alert, we pride ourselves on being the best in the business at predicting business failure and success; our scorecards are a big part of that. However, post-pandemic we started to see a rise in what we call ‘catastrophic failures’. This is where a company fails with very little warning and goes from a ‘Bronze’ or better score to ‘Insolvent’. Whilst there will always be catastrophic failures, it did show us that a new world needs a new way of analysing business data. We embarked on the project to not only create the UK’s first post-pandemic, COVID-proof scorecards, but also refine our already industry-leading system.

This was a massive undertaking by our data scientists, who analysed millions of company records and performances, both pre- and post-pandemic, and ran hundreds of thousands of tests. The result of this is not only a scoring system better suited to the post-pandemic world but one that is even more accurate than ever before.

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What’s changed?

Whilst the changes to our software are sweeping and significant, most will be ‘behind the scenes’ and will not alter the way our customers use or interact with the Red Flag Alert program. They will, however, immediately benefit from an algorithm with an even more accurate business health score. 

The key changes are:

  • Increased accuracy – We have always been proud of the accuracy of our insolvency score and our new scorecards are testing at an accuracy rate of 92%.
  • More scorecards – As explained before, different types and sizes of businesses require various ways to measure financial health. As technology has given more ways to conduct business and even created new sectors entirely, there are now more distinct types of companies than ever before. As such, we have moved from an eight-scorecard system to using twenty scorecards. This allows Red Flag Alert to be incredibly granular in how we analyse and measure business health.
  • Monthly performance testing – Our new system will undergo monthly performance testing. Allowing us to adapt in near real-time to any changes that significantly affect the financial health of UK companies as a whole.
  • Some companies' ratings will change – When the new scorecards get switched on some ratings will change to better reflect their financial health in the current economy.
  • Newly Formed and Provisional ratings – Our 'Amber' rating will be removed from our system. Whilst meant to represent recently created companies that did not have enough information for us to give an accurate rating, we recognise that some found it confusing. Moving forward a new company that has not yet submitted a set of financial results will be rated as ‘Newly Formed’. Any company that has only submitted one set of accounts will be given a ‘Provisional’ rating between Silver and 2 Red Flags.

 Red Flag Alert will continue to innovate and develop our platform over time. This ensures that our customers have guaranteed peace of mind and know that their business is in safe hands. They can make informed decisions and protect themselves using some of the most powerful business data currently available on the market. 

Protect Your Business from Insolvency with Red Flag Alert

Firms can be put at risk from their customers or suppliers becoming insolvent. 

Red Flag Alert helps you protect your business from this. We are the UK’s only independent credit referencing agency.

We hold data on every UK company, as well as businesses in countries around the world. 

Our business insolvency risk scores indicate the likelihood that your customers or suppliers will become insolvent. 

We collect more information from a greater number of reliable sources than any of our competitors—meaning we spot risk factors that they don’t. 

Our database is updated in real time so that you can base your decisions on accurate, up-to-date information.

To see some of the powerful insights our data provides, get a free trial of the platform or read our Q4 Intelligence Report. Already a client? Login here 

Published by Red Flag Alert May 9, 2023

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