“Banks need to continue to lend to creditworthy borrowers to earn a profit and remain strong.” – Ben Bernanke
There are numerous tools that will allow you to investigate the financial viability of a company. Credit Safe and Experian are just two of the more commonly known ones. These analysis portals are useful sources of market and competitor information which can provide vital insights for the entrepreneur.
All analysis tools come with important caveats, the main one is that they all use historical data. In the worst case can be up to 21 months out of date!
A further area of concern is that most companies work towards their reporting dates. They are likely to be dressing the balance sheet for the most favourable impression which may, therefore, be different to day-to-day reality.
Finally, the tools themselves are only of value if the viewer understands how to read and understand them. It may be worth getting external advice when reviewing the really vital relationships.
In the case of your own business, never underestimate the power of prompt and efficient payment to your suppliers particularly if they are small tradesmen. To achieve this, not only do you need to pay promptly, you need to have efficient systems to record and track invoices and payments.
A strong record of on time payment will help considerably when negotiating prices and also in times of tight cash flow when some forbearance may be required.
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It is also worth knowing the strength of your suppliers. A cash strapped supply base will be restricted in its ability to hold stock or provide services. Ultimately, they may not be able to serve their customers either temporarily or permanently.
Fundamentally though, it is important to know if the customers you serve carry sufficient creditworthiness to be allowed credit. Take a look at their cash availability, their record of prompt payment, any county court judgements incurred and the length of time they take on average to pay their bills.
If you use a credit checking site, keep an eye on the reports for your competitors, they can provide useful market intelligence.