When we receive debtors’ lists from clients, what are we looking for? Here are some points to consider;
- The spread of debtors, i.e. how many are there? Too few names can mean that the overall debtors’ book is concentrated in a small number of debtors and if one of them fails, our client may have a cash flow problem as a result. On the other hand, too many names could make it almost impossible for us to collect should we be forced to do so under our cession.
- The age-analysis of the debtors, i.e. how long are they taking to pay? If the book is very current (debtors pay very quickly – either because they can get a discount from our client by doing so, or because our client extends very short credit terms) it is of little value as security for our facilities. The reason for this is that we are usually one of the last to know that our client has a problem and, if we have to collect from the debtors to get repayment of our facilities, the likelihood is that the debtors will have already paid our client in the normal course of business. This is why we apply a very small advance value/margin to a debtors’ book for collateral purposes. Conversely, debtors taking too long to pay may indicate that they may have cash flow problems themselves or that our client is too slow in collecting debtor payments.
- The spread of debtor amounts, i.e. is the total outstanding figure spread reasonably evenly amongst the debtors or do one or two debtors owe a significantly large portion of the total? This can lead to problems for our client if those one or two debtors slow their payments or completely fail to pay. Remember the impact of bargaining power when exercised by larger businesses over smaller ones.
- The quality of the names in the list, i.e. are there names that we know are potential bad debts and who will never pay? Also, are there perennial slow payers in the list that will affect our client’s cash flow, e.g. government, large corporates etc?