We all are vaguely aware of the concept of vendor assessment. However, customer assessment is a lesser-known concept. Because who cares to know more about a customer? He is business and one never lets go of the business, right? However, bad debts and default on payments are common problems. In this article, we talk about two essential things that you should check about your customer, every year, to re-evaluate your relationship with them. Ofcourse, you would know a lot just by working with them and through references. But would you be able to tell in time when things start moving downwards?
- Financial growth and margins: Always check growth/decline in operating revenues of your customers in the last financial year. Then, compare it with other similar companies in the industry. Are the revenues declining? Is it a company-specific decline or is the whole industry facing a difficult time? Also, look at gross margins and net profit margins. Are they narrowing for the company or the industry? Looking at these things would at least warn you of any difficult times ahead and prepare accordingly.
- Days payable outstanding ratio: This is an important indicator but few people take note of this ratio. It indicates the average number of days a company takes to make payments to its vendors. If your client has days payable outstanding of 45 days, then that’s the average time in which to expect the payment from him. You should check this ratio every year. If it is increasing, then that’s a sign of warning. When trouble starts, the first thing that gets affected is the days payable outstanding ratio.