“This is one thing we see a lot of – contractual arrangements between customers and suppliers won’t deal with insolvency,” Forrest says.

Typically, contracts are not reviewed over the years. “We often find that, especially in long-standing relationships, where contract documents were drawn up back in the day, they no longer describe and cover what is happening in the present,” says Forrest.

Suppliers can end up contractually obliged to their customers, even when they know things are going wrong, and can do nothing to extract themselves. If the contract is exclusive, the result can be devastating. “You need to find someone else, not haggling with this customer. You need the ability to exit quickly.”

The second mistake

Liquidator and turnaround specialist, Schon Condon, of Condon Associates, advises that suppliers treat their relationships with customers with the greatest care and attention. “This starts from the first day. Companies must have an intrinsic and detailed relationship with their customers. They should know as much about their customer as they do about their own suppliers. Approach it in a team manner, seeking to work to ensure their customers’ success, as well as their own.”

This means being intimately acquainted with their clients’ plans, their market share, their financial structure, their strengths and weaknesses. “And, as the market changes suppliers should be monitoring that market to ensure their customer is making changes to move with the market.”

The real problem

Condon says the problem is not [just] the money that will be lost should the customer collapse. “It is not the X dollars of stock that is catastrophic. If this business represented 10% of turnover, the largest amount of damage is from the loss of that revenue into the future,” he says.

Of course, leading companies are aware that if they act with too much haste, they may push their own customer from a cash squeeze into a collapse, and contribute to their own loss. “Sometimes they are your most important customer. You don’t bring this relationship to an end lightly or take action unless you have to. It is a very tough call.”

Forrest says that using lawyers to investigate the solvency of customers can be particularly useful in some cases because their investigations are covered by client privilege and the liquidator cannot see them. “It may be a self-serving point, but it is true,” he says.

Quick fix

If, despite all due care, a customer starts to become more trouble than they are worth, taking action can protect revenue. Reducing credit terms, even going as far as asking for cash on delivery, or requiring security or director’s guarantees might work against you in the event of liquidation, but will prevent throwing good money after bad.