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Mark Halstead of Red Flag Alert writes of the importance of carrying out due diligence to mitigate risk in your business.
The professional security world is centred around protecting the property of clients, be it physical or digital. However, it’s important to protect yourself too; have you ever stopped to think about who your clients really are? With more and more UK businesses falling into financial distress, it’s becoming increasingly important to protect your own business against the potential impact of your clients or suppliers failing. Data shows that 14pc of all active UK businesses are in significant distress, with the average company debt rising by 122pc in just three years to £66,000.
Certain companies are higher risk than others; for example, companies with a director/shareholder charge over business assets 2.8 times more likely to fail than others.
In these unstable conditions, it’s becoming more important than ever to be aware of these risks and to carry out thorough due diligence.
1. Supplier due diligence: Check that your supplier is legitimate and financially secure to minimise risk and avoid having to deal with any unfinished projects.
2. Onboarding new clients: Assess the financial health of new clients during onboarding to make sure they pass credit checks and won’t pose a future risk.
3. Monitoring current clients: The financial health of current clients can fluctuate and should be assessed regularly so you can respond to any change in circumstances.
4. Build sales and marketing lists: Using data can help you understand and segment the market to zero in on the best prospects.
Supplier due diligence
Finding the right supplier can be critical to the smooth running of your own business. It’s important to find out about the quality of the service they provide, check credentials and assess financial health.
Check that they have the right accreditations, qualifications and insurance and ask to see proof or check with the relevant registering body. It’s also important to make sure your suppliers are in good financial health so that the supplier can complete your project. Find out about the liquidity and capital adequacy of the company, both factors that can increase the potential risk of working with a supplier. Find out who funds the business, and proceed with caution if it’s not the owners. If they’re not willing to invest in the business, why should you?
Mitigating on-boarding risk
Before on-boarding new clients, it’s important to carry out due diligence to ensure that they pose minimal risk to your business. Nothing is more frustrating than spending lots of time and energy on winning a client only to find out that they don’t pass the credit check or become a client and fail to make payments, so carrying out due diligence beforehand can save you time and money. Take the time to clearly define your on-boarding policy so that you can focus on working with businesses that are financially secure and rejecting any that pose a credit risk.
Data can be used to assess the credit risk of new clients by taking into account factors like liquidity or levels of gearing. Real-time updates can also let you know of any sudden changes in their financial position so that you can protect your business accordingly.
It’s important to carry out due diligence on existing clients as well as new ones to mitigate any emerging risks to your business. Just because a client was financially secure six months ago doesn’t necessarily mean that the same is true now, particularly with more and more UK businesses facing insolvency. Real-time data will give you warning about any changes in your client’s circumstance. If there is a reduction in profitability or your clients are having problems with cash flow, knowing about it early on can help you to protect your own business. Conversely, these updates can also highlight when your clients may be receptive to making more purchases, for example, if their profits have been increasing or if they have a new director who may be interested in your product.
Build sales and marketing lists
Carrying out due diligence can also help ensure that your sales and marketing teams are targeting prospects that are most likely to be interested in your product or service.
Having detailed data on the sector, revenue and location of businesses can help you segment prospects into different buyer profiles. With highly-specific customer segments, your sales and marketing team can tailor their efforts more specifically at different groups. For example, you may be selling your door access control system to a wide range of clients with diverse needs. By segmenting clients into groups like ‘gyms and leisure centres,’ ‘banks’ and ‘offices’ your sales team can focus on the features of your product that are most attractive to each different group.
Perhaps the gym might be looking for an access system that lets members enter and leave the building easily with 24-hour access and a key card system, whereas a shared working space may be more focussed on visitor registration features. A sensible due diligence process will help remove considerable uncertainty and risk. Whether you are publically listed or a small company, access to the right data is becoming more and more important.
About the writer
Mark Halstead is a partner at Red Flag Alert, which provides detailed financial health ratings on UK businesses to help companies conduct due diligence and make informed credit decisions.