When Accountants Let Creditworthiness of New Clients Slide

By Nancy Seiverd, President, CMI Credit Mediators Inc.

As tax season is now upon us, there’s often the opportunity for accounting firms to take on new business clients. Without question, it’s always nice whenever a new client knocks on the door and there’s the hope that a small initial tax return can gradually evolve into providing full-scale auditing and consulting services. But, as we credit professionals understand, not every client turns out to be “sterling silver.”

My experience in working with CPA firms is that it appears accountants prefer taking on new clients at face value, not really confirming if there are any issues that could impede the client from eventually paying them. But like in any business that provides its products and services on credit, accounting firms should also take a step back and understand the creditworthiness of a new client.

When it comes to the core of obtaining credit information and understanding credit worthiness, accountants are in a prime position. By usually having complete access to review previous tax returns and financial statements, they have clear insights into the financial viability of a company. This is the kind of information that credit reporting bureaus clamor for and normally need to estimate in order to support other non-financial credit data.

If a commercial client is having cash flow issues, by initiating an honest dialogue, accountants not only get a handle on the credit worthiness and payment ability, they can make this a leading opportunity to see how they can support the client and, at the same time, help to ensure getting paid for the accounting services rendered.

Here are a few basic areas to review, confirm or propose in order to more fully grasp a client’s liquidity status and its overall credit risk management system.

A/R Aging Report – Right here is where one can see what accounts are outstanding and confirm the payment status and collection action plan, especially for the larger balances over 60 days. If there are a significant number of accounts past due and little collection effort is being made, bringing in a third-party collection partner should be actively pursued.

Billing Cycle – For some companies, especially in construction and the manufacturing of large equipment, completion of the product to shipment can take months. In this kind of situation, confirming how much the client’s customers are paying as down payments and progress payments that will sufficiently cover costs, is imperative. Generally speaking, if less than 70% is being received at the time the product is being shipped out, especially with terms over 30 days, a change for either receiving more at the time of shipment or requiring shorter payment terms may need to be considered.

Credit Controls – Reviewing how a client is extending credit to customers is paramount. If the client’s customers end up not paying the client, the client in turn cannot pay his suppliers, which includes the accounting firm. Although the credit risk management system can be quite extensive, one can get a general understanding of the process by verifying:

• How credit is established for new customers – how the credit levels are determined, what credit confirmation tools are used, and the chain of command as to who approves them.
• How credit is maintained and updated for existing customers – reviewing and evaluating the payment history against the established credit limit.
• How credit is put on hold – once a credit limit is established the system should not allow any shipments to go out if the amount outstanding plus orders to be shipped exceed the credit limit.
• How disputes are processed and resolved – you will often find that one of the reasons for poor cash flow in a company is that there are some very large receivable balances being disputed and the client can’t seem to get their arms around on how to resolve them.

Even knowing that a new client has credit risk management and cash flow problems doesn’t mean that it can’t be a wonderful new client. It just takes identifying and communicating the reasons for cash flow challenges and helping them to work through them. Not only will the accountant endear him or herself to the new client, but they will also be directly participating in the client’s long term viability and helping to ensure that payments for their services will be forthcoming as well. 

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This article has been edited by Steven Gan.

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