Ten Red Flags that Signal Financial Distress in Business Customers

Five years after the onset of the COVID-19 pandemic, many businesses are still in recovery, e.g.,  contractors from continuing disruption in their materials supply chains, cinemas still trying to lure back moviegoers, and department stores competing with online shopping.  In fact, business bankruptcy filings have been rising in recent years, pushed up by higher interest rates and inflation. Whether the business is a customer, supplier, or borrower, evaluating its financial health is essential to maintaining a satisfactory relationship with the firm. This session offers ten red flags to identify ailing firms before they file for bankruptcy protection.

• Identify ten red flags for identifying, evaluating, and  monitoring financial distress
  • 1-ailing industry
  • 2-declining financial condition and operating performance
    • decreasing sales, gross profit margins, net profits
    • shrinking liquidity, rising leverage, eroding solvency
  • 3-organizational volatility
    • management and director turnover
    • employee layoffs
  • 4-professional changes
    • Law firm
    • Accounting firm
    • Insurance agent
  • 5-asset disposition
  • 6-change in ownership
  • 7-credit deterioration
    • COD terms, judgments, liens
    • Overdrafts, default, foreclosure
  • 8-declining communication
  • 9-major casualty loss from weather-climate elements—fire, flood, etc.
  • 10-negative media coverage—complaints, poor online product-service  reviews, lawsuits, arrests
• Understand the interconnections among these red flags, e.g., change in ownership and management, employee turnover, declining liquidity, and slower trade payments
• Take appropriate action to mitigate any adverse impact from potential failure

• These red flags warrant close attention and force participants to understand that their organization’s relationships with its own suppliers and customers open them to possible losses from above and below
• The continuing volatility and uncertainty in the economy necessitate that creditors and lenders evaluate a borrower’s depth and breadth of its supply chain—quality and quantity of goods and services substitutes, reliability of alternate suppliers, trade credit costs, modes of transportation, delivery times, etc.
• The suggested red flags are likely to get bankers and suppliers thinking of other distress indicators to monitor and improve the ability to avoid, lessen, and prevent credit losses before bankruptcy is declared.

• Credit Managers
• Accounts Receivable (AR) Teams
• Finance Directors and CFOs
• Sales Managers and Account Managers
• Business Owners and Entrepreneurs
• Risk Management Professionals
• Commercial Lenders and Bankers
• Trade Credit Insurers
• Procurement and Supply Chain Leaders
• Investors and Financial Analysts

A frequent speaker, instructor, advisor and writer on credit risk and commercial banking topics and issues, Martin J. "Dev" Strischek principal of Devon Risk Advisory Group based near Atlanta, Georgia.  Dev advises, trains, and develops for financial organizations risk management solutions and recommendations on a range of issues and topics, e.g., credit risk management, credit culture, credit policy, credit and lending training, etc.  Dev is also a member of the Financial Accounting Standards Board’s (FASB’s) Private Company Council (PCC).  PCC’s purpose is to evaluate and recommend to FASB revisions to current and proposed generally accepted accounting principles (GAAP) that are more appropriate for privately held firms.  He also serves as the PCC’s representative to FASB’s Credit Losses Transition Resource Group supporting the new current expected credit loss (CECL) standard to be implemented in fiscal year 2019 for public companies and 2020 for private firms.

The former SVP and senior credit policy officer at SunTrust Bank, Atlanta, he was responsible for developing, implementing, and administering credit policies for SunTrust’s wholesale lines of business--commercial, commercial real estate, corporate investment banking, capital markets, business banking and private wealth management. He also spent three years as managing director and credit approver in SunTrust’s Florida commercial lending and corporate investment banking areas, respectively. Prior to SunTrust, he was chief credit officer for Barnett Bank’s Palm Beach market. Besides stints at other banks in Florida, Kansas City, and Ohio, his experiences outside of banking include CFO of a Honolulu construction company, combat engineer officer in the U.S. Army, and college economics instructor.

A graduate of Ohio State University and the ABA Stonier Graduate School of Banking, Dev earned his M.B.A. from the University of Hawaii. Mr. Strischek serves as an instructor in several banking schools, including the Stonier Graduate School of Banking, and the Southwest Graduate School of Banking. His school, conference, and workshop audiences have included participants drawn from the ABA, RMA, OCC, Federal Reserve, FDIC, FFIEC, SBA, the Institute of Management Accountants (IMA) and the AICPA.

Mr. Strischek has written some 200 articles on credit risk management, financial analysis and related subjects, and he is the author of Analyzing Construction Contractors and instructor of  a contractor analysis workshop. A past national chair of RMA and former RMA Florida Chapter president, Dev has consulted on credit risk issues with banks in Morocco, Egypt, and Angola through the US State Department’s Financial Service Volunteer Corps (FSVC).