An insurance broker contacted me recently because a large, European-owned industrial manufacturer had expressed interest in trade credit insurance. They had one particular customer that had become a concern, although they were quick to point out that they had never had any problem collecting their accounts receivable from this customer. Nevertheless, the customer could file bankruptcy or their accounts receivable could become un-collectible at any moment, or at least that was the concern.

The broker went on to explain that this key client had all the in-house financial resources to manage their risk (credit, treasury management and collection departments), so they were very capable, unlike smaller firms without these resources.

When I researched the key customer that was now of concern, I quickly realized why this manufacturer wanted to protect themselves. The customer in question had:

• Negative net worth
• No profit since 2012
• S&P rating downgraded to CCC (junk status)

Then the irony of the situation hit me… the manufacturer’s crystal ball was dirty!

I’ve seen the scenario play out often. It usually sounds something like this…

• “We know our customers very well.”
• “We manage our a/r very tightly.”
• “Our customers always pay.” or “pay like clockwork”
• “We never have problems getting paid.”

What do all of these statements have in common? They are all backward looking. They all assume that a customer’s future payment performance is guaranteed. They assume that past performance always predicts future performance. They assume that financial managers in companies both large and small have a crystal ball and can see into the future. Unfortunately, none of these is always true.

If we truly had a crystal ball, we’d have perfect knowledge of the future and would know which customer would default on the money owed for products or services bought. We’d know which company to avoid when the sales department brings in a new purchase order. We would avoid problems before they became problems because our crystal ball would show us the future.

In reality, our crystal ball is dirty and has a flawed view of the future. Heck, we don’t even have a crystal ball! Let’s replace the usual scenarios listed above with reality:

• “We always get paid, until the time when we don’t get paid.”
• “We know our customers very well, but have no way to be guaranteed they’ll pay”
• “Our customers always pay like clockwork, right up until they don’t pay at all and we never see it coming.”

The examples are too numerous to list here but suffice it to say that from my view, plenty of companies have found that a dirty crystal ball can lead to unpleasant surprises when the expected payment doesn’t come. That’s when they turn to credit insurance and find that it may not be available. Wouldn’t it be great if they got ahead of the risk instead of reacting once it’s too late?

What about you? Do you have any stories of not getting paid unexpectedly? Please share them in the comments below.