Why Upgrading Due Diligence Can Solve Your Cash Flow Crisis

Our close partners Begbies Traynor, and their affiliates, bring their expertise in insolvency and business financial health to this guest article and provide valuable insights and advice into the state of UK business.

All businesses are exposed to credit risk, however, how they calculate, manage and mitigate this risk is what sets them apart; this is where due diligence plays a central role. A high-performance due diligence and credit risk management strategy is instrumental for businesses to reduce exposure to financial risk and avoid unnecessary interruptions to cash flow and company reserves.

Without a due diligence process in place that’s fit for purpose, company cash flow can quickly deplete due to late or missed payments and consequently, push the company into crisis mode. Sharon McDougall, a personal and business debt adviser at Scotland Debt Solutions, looks at why an upgrade of due diligence systems may be imperative to keep a cash flow crisis at bay.

The dangers of a cash flow crisis

A cash flow crisis can strike a business after months of accumulating late and unpaid invoices, some of which may now have matured into bad debt. This can wipe off hundreds of pounds worth of income forecasted by the business and tagged as accounts receivable. If a business bides its time until the tide eventually turns in its favour, this will delay damage control efforts that can prevent a company from reaching a critical point.

Company debtors are often the root cause of cash flow problems, as the longer they delay payments, the longer the business is deprived of cash. This is where due diligence can filter the bad apples from the good due to the added transparency afforded by screening customers for red flags and assessing credit risk.

Due diligence and measured risks

The beauty of due diligence is that businesses can take measured risks when engaging with businesses. An airtight due diligence procedure minimises risk exposure and covers all bases. Due diligence involves assessing the creditworthiness and credit risk of customers, suppliers and external parties that a business wishes to engage with. A multi-layered due diligence strategy also digs deeper to expose insolvency risk.

The decisions due diligence can help shape include:

• Whether to engage with a business
• Whether a customer is creditworthy
• How much credit to extend
• The conditions under which to offer credit
• The flexibility of payment terms

Due diligence checks are conducted using intuitive, purpose-built technology that provides a simplified financial health rating of UK companies. Such platforms rely on live data feeds from The Gazette to track deteriorating financial health, as indicated by county court judgments and winding up petitions. Some tools go as far as to support the collections process by providing the necessary information required to contact the debtor successfully and call in debts.

A look into the financial history and borrowing attitude of businesses can help paint a picture of credit risk. Early access to information of this nature can shape key decisions, such as whether to extend credit or provide a payment extension. Without access to such information, a business is uninformed about financial risk and blind to insolvency risks which can have detrimental consequences.