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One of the golden rules of business is that cash flow is all-important.  Ultimately cash flow depends on customers paying their bills and that, in turn, depends on them being solvent enough to do so.  Given these two hard facts, it makes sense to take client insolvency into consideration when creating your business plans, even when economic times are good and especially when economic times are challenging.  As the old saying goes, hope for the best, but plan for the worst and here are three tips to help you do so.


Diversification is one of the golden rules of investment and the concept applies equally well to business.  The fewer customers you have, the more at risk you are if anything happens to any of them and vice versa.  Of course, the flip side to this is that the more customers you have the more customers you have to manage, hence for many businesses the ideal scenario would be to have a core base of repeat/long-term customers alongside a wider range of ad hoc/short-term customers.

Keep your eyes, ears and mouth open

Contrary to the old adage of keeping your eyes and ears open and your mouth shut, your mouth can be a valuable tool when it comes to steering your business.  You need to talk to appropriate people to find out what they know that you don’t and the chances are that they will only talk to you if you talk to them.  In other words, network in an ethical manner with people you feel you can trust.  Obviously both you and they will have to respect client confidentiality, but there is often a lot of useful information can be shared without any breach of confidentiality.  Likewise, pay attention to public data sources both mainstream and industry/niche.  A lot of the time you will find red flags being raised by those in the know long before a company actually admits publicly that it’s in trouble.

Have a realistic “stop loss” strategy

This is another concept carried over from the world of investment.  Human judgement is an excellent and important tool, the problem with it is that it can be easily clouded by human emotion.  Because of this is can be very valuable to create a framework for resolving payment issues when everything is going well and you don’t think there’s any realistic prospect of you needing to use it, so that if you do, it’s there and waiting for you (rather like buying an umbrella or taking out an insurance policy).  Of course, it’s unlikely that you’ll be able to foresee every possible situation, hence the framework is there as a guidebook rather than a rule book.  The point of it is to help you to take emotion out of your decision-making process and focus on using your judgement.  A part of this framework should be to identify indicators that, painful as it may be, it is time to cut your losses and move on, in a legal and ethical manner.  You may not like the idea of “leaving money behind”, but the simple fact of the matter is that this is only relevant if you think there is a realistic likelihood that you will get it and if there are strong indicators that you are not going to be paid then it is better to have to absorb a small loss than a big one.  Putting such a framework into place can also prove useful from the point of view of writing effective contracts, which, in this context, means ones which allow you to walk away, legally, if the client fails to make (part) payment as stipulated.


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