Invisible erosion: Why your 'A' clients might not be as healthy as you think

If you still define your best clients as those paying the highest fees, with a stable business and a strong balance sheet, it might be time to revisit that assumption. A wave of regulatory, economic and technological shifts is quietly eroding the financial position of businesses that used to look perfectly healthy on the surface. As their accountant, you're uniquely placed to spot the warning signs.

Changes which will impact your clients

Several things are converging at once, and they hit hardest in sectors that have traditionally been asset-light but lease-heavy, labour-intensive, or reliant on vehicle fleets. This might include clients in sectors such as logistics, warehousing, engineering, manufacturing and distribution.

1. FRS 102 lease accounting will mean that clients who lease assets (including commercial property), now have to recognise significant lease liabilities on the balance sheet. What was once a footnote can suddenly become a £1.2m liability, tripling gearing ratios overnight. That alone can trigger automated bank covenant breaches, pushing a client from "green" to "amber" on their lender's internal credit scoring without any change to their trading or cash flow position. 

2. Wage cost pressures are compounding things further. The National Living Wage increase to £12.71 per hour doesn't just affect minimum wage staff. The real damage may happen with the ripple effect, where skilled workers are also demanding rises to maintain pay differentials. One client with ten junior warehouse staff faced a headline cost of £25k, but the true unbudgeted hit was eventually £110,000.

3. Rates increases from local authorities are causing significant shocks this year. Whilst pubs are receiving a lifeline from the Chancellor, others in hospitality, retail or even on business parks, will not have a similar relief. Again, sectors such as manufacturing, warehousing and larger retail operations will suffer the most. 

4. Motor finance exposure is another risk. Following the FCA's motor finance probe, lenders are downgrading residual values on PCP agreements to cover potential redress costs. Clients running delivery fleets are seeing balloon payments coming in 18% higher than expected. Plus refinancing new assets will be more expensive, as lenders adjust to these new costs to their own business. 

5. The AI competitiveness gap. Businesses that haven't adopted automation are losing tenders to competitors who have (sometimes by as much as 15%) and they may not even understand why. Those which don’t progress fast will effectively go backwards. 

Reassessing your 'A' clients

An 'A' grade client today isn't just one with high fees and low debt on paper. You need to look deeper. 

• Consider whether their balance sheet still looks strong under the new FRS 102 treatment. 

• Check their exposure to covenant triggers and ask whether they've stress-tested their banking and credit facilities. 

• Review their workforce cost structure for ripple-effect vulnerability and understand what increases they will expect with their other overhead costs this year. 

• Assess whether their fleet or asset financing arrangements carry hidden repricing risk. 

• Finally, consider their competitive resilience - are they investing in technology, or are they being quietly undercut?

Practical advice for your clients

Find out your clients covenant requirements and speak to us early if you think they will breach them, so we can review what alternative facilities may be available. 

Review all PCP and vehicle finance arrangements well ahead of renewal dates. 

And encourage clients to explore even modest AI or automation tools to protect their margin on competitive tenders. For those in manufacturing, the Made Smarter scheme can provide advice, as well as grants for digitalising production lines and operations. 

Getting ahead 

The risks here are invisible, because they don't always look obvious ahead of time. But when you know the risks, you can predict possible erosion of profits, cash or credit facilities. 

Geopolitical turmoil continues to affect the price of energy and this will have a longer term impact on the supply chain for all businesses. 

Assess which companies were most affected following the invasion on Ukraine, and this will help you predict which may be most impacted by any further energy shocks. 

To discuss possible new lending facilities from over 130 lenders or how the credit review service can help your clients access more supplier credit, contact your dedicated Partnership 

Manager by emailing partner.support@capitalise.com