Surviving the economic downturn is not just about looking after your own business. Monitoring the performance of significant customers/suppliers can be crucial to your financial performance. Businesses will run into serious difficulties if they do not get paid by customers or their suppliers go out of business.

Failure of one company in a supply chain can have a serious impact on the rest of the chain which can lead to financial loss, reputational damage and even insolvency.

We provide some practical guidance on supply chain management to help avoid this unwelcome scenario.

The pen is mightier than the sword. Ensure that you have a proper written contract in place with all customers/suppliers covering key issues such as termination and payment. In appropriate cases, review your contractual arrangements with suppliers/customers where financial solvency may be an issue to see if contractual terms can be improved, if only in relation to credit terms.

Take appropriate security. The most common form of security is a retention of title clause. A basic retention of title clause allows the supplier to provide goods to a buyer, but provides that title to the goods is retained by the supplier until it has received full payment for the goods. The supplier can then reclaim the goods in the event that the full price is not paid. See the forthcoming part 3 of our survival guide on retention of title for further information. Review your existing retention of title clause to ensure that it is up to date and as robust as possible. If you don't have one, consider including one in your terms and conditions of sale.

Review your credit terms. Protect yourself by tightening your credit terms in appropriate instances. This can include reducing the number of days that credit is offered or refusing to supply more goods until all outstanding invoices have been paid. Be careful about being overly aggressive - you don't want to send the wrong signal to the market place about your own financial solvency. Ensuring you are not dependant upon a small number of customers will also help.

Undertake appropriate credit checks. Suppliers should check the creditworthiness of new or potential customers and if possible re-assess existing customers. Businesses should undertake a financial review of suppliers to ensure that they can carry on providing the equipment necessary to carry on trading.

Maintain an appropriate dialogue. Keeping open a line of communication can help identify issues before they surface. Once an issue arises, early dialogue can lead to action to resolve issues before they turn into a problem.

Watch out for signs of distress. Customers who are normally good payers start to delay payments for unexplained reasons. Queries increase and broken promises of payment are regularly made. Suppliers may also exhibit similar symptoms when supplies are delayed. You may need to take immediate action to protect your business.

Keep your options open when confronted by an existing customer who is not paying. If negotiation fails, there are a number of options depending on the circumstances. Seek legal advice about whether it is best to threaten legal action (if you make a threat and do not follow it up this may be perceived as a weak stance), issue proceedings or take some other option such as issuing a statutory demand. See the forthcoming parts 4 and 7 of our survival guide on winding up issues and points to consider before commencing a claim.

Put in place an appropriate contingency plan. If you are dependant on a few suppliers, you need to have in place a plan B. Check and calculate stock levels. Consider stockpiling, making enquiries of alternative suppliers or, if financial circumstances permit, buying out your supplier or taking a controlling interest in it.

Compelling supply. In some circumstances the court will order the supply of goods to continue in a situation where a supplier in insolvency is refusing to continue to supply unless substantial payments are made by the customer. We acted in the leading case in this area - Land Rover Group Ltd v UPF (UK) Ltd (in receivership).