VBackground & AnalysisGuide
Reading a Customer's Balance Sheet: Warning Signs Before Large Orders
If you deliver and wait for payment, you are giving your customer credit. Before large orders, it is therefore worth looking at the customer's figures. This guide shows what is publicly available, how to rate four ratios in an hour, and which warning signs matter beyond the numbers.
Key takeaways
- Small German corporations only have to disclose their balance sheet, not their income statement, and up to twelve months after the balance sheet date. Public figures are therefore often old and incomplete.
- Kralicek's quick test rates four ratios with grades from 1 to 5: equity ratio, debt repayment period, return on total capital, and cash flow relative to revenue.
- An analysis of around 2.45 million annual records of European SMEs shows: financial structure distinguishes failed firms most strongly from others, followed by working capital.
- The balance sheet is a rear-view mirror. Only together with payment behavior, disclosure discipline, and a conversation with the customer does it lead to a decision on credit limit and payment terms.
Why a large order is a loan to the customer
A new customer orders goods worth 80,000 euros, payable 30 days after delivery. For your sales team, this is a success. For your liquidity, it is an unsecured loan of 80,000 euros to a company you know little about. If the customer becomes insolvent, the money is usually largely lost, and at a 5 percent margin you need many times that amount in additional revenue to make up for the loss, as Business partner due diligence calculates.
This guide therefore answers a practical question: How can an owner without accounting training read a customer's figures so as to recognize the most important warning signs before a large order? To answer it, we first clarify which figures are accessible at all, then present a simple rating model, work through it with an example, and add the warning signs that no ratio shows. At the end comes the path from finding to decision.
Which of a customer's figures can you see at all?
Corporations such as the German GmbH and AG, as well as certain partnerships, must disclose their annual financial statements. Since August 2022, this has been done via the company register (Unternehmensregister), which can be viewed free of charge. What appears there, however, depends on size. Since April 2024, a company is considered small if, on two consecutive balance sheet dates, it does not exceed at least two of three thresholds: 7.5 million euros total assets, 15 million euros revenue, 50 employees.
| Size class | Thresholds (two of three) | What becomes public |
|---|---|---|
| Micro | up to €450,000 total assets, €900,000 revenue, 10 employees | only an abbreviated balance sheet, often merely deposited and viewable on request |
| Small | up to €7.5m total assets, €15m revenue, 50 employees | abbreviated balance sheet and notes, no income statement |
| Medium-sized | up to €25m total assets, €50m revenue, 250 employees | balance sheet, partly abbreviated income statement, notes, management report, audit opinion |
| Large | above that | complete, audited financial statements with management report |
Two limitations follow from this. First, for most small customers the income statement is missing, that is, the view of revenue, earnings, and depreciation. Second, the financial statements only have to be disclosed twelve months after the balance sheet date. In fall 2026, the latest public accounts of a small customer are therefore often those for 2024. For sole proprietorships and most partnerships, there are no public figures at all.
The thinking model: Kralicek's quick test
The Austrian business economist Peter Kralicek developed a quick test that is widespread in German-speaking countries because it needs only a few figures. It rates a company with four ratios, two on financial stability and two on earning power. Each ratio receives a grade from 1 (very good) to 5 (at risk of insolvency). The average gives the overall assessment.
| Ratio | Calculation | 1 very good | 2 good | 3 average | 4 poor | 5 at risk of insolvency |
|---|---|---|---|---|---|---|
| Equity ratio | Equity ÷ total assets | above 30% | above 20% | above 10% | below 10% | negative |
| Debt repayment period | (Liabilities minus cash) ÷ cash flow | under 3 years | under 5 years | under 12 years | over 12 years | over 30 years |
| Return on total capital | (Net income plus interest expense) ÷ total assets | above 15% | above 12% | above 8% | below 8% | negative |
| Cash flow margin | Cash flow ÷ revenue | above 10% | above 8% | above 5% | below 5% | negative |
Cash flow here is, in simplified terms, net income plus depreciation, that is, the money the business generated itself during the year. The debt repayment period asks how many years the business would need to repay its debts from this cash flow. The return on total capital shows how much the capital employed yields overall, regardless of whether it comes from owners or banks.
An analogy makes the test tangible. At a routine appointment, a family doctor measures blood pressure, pulse, weight, and one blood value. None of these figures makes a diagnosis. Together, however, they show whether someone appears healthy or whether a closer examination is needed. The quick test does the same for a customer's figures.
One ratio proves nothing. Four ratios pointing in the same direction deserve a decision.
The quick test in an example
Suppose a customer has sent you his financial statements on request. Total assets amount to 2.0 million euros, equity to 240,000 euros. Liabilities are 1.76 million euros, cash 60,000 euros. Revenue is 3.0 million euros, net income 40,000 euros, depreciation 80,000 euros, and interest expense 50,000 euros.
Equity ratio
240,000 ÷ 2,000,000 = 12 percent. This is above 10 percent and gives grade 3.
Debt repayment period
Cash flow = 40,000 + 80,000 = 120,000 euros. (1,760,000 minus 60,000) ÷ 120,000 = around 14 years. This gives grade 4.
Return on total capital
(40,000 + 50,000) ÷ 2,000,000 = 4.5 percent. This is below 8 percent and gives grade 4.
Cash flow margin
120,000 ÷ 3,000,000 = 4 percent. This is below 5 percent and gives grade 4.
Worked example with freely chosen figures. Overall grade as the simple average of the four grades.
The overall grade of 3.75 is close to poor. The customer is not acutely at risk, but has little buffer: thin equity, low return, a long debt repayment period. A weak year or a large bad debt of his own could get him into trouble. For an order of 80,000 euros, this is no reason to decline, but it is a reason for different payment terms.
Warning signs that no ratio shows
Tascón, Laitinen, Castaño, and colleagues (2023) analyzed around 2.45 million annual records of small and medium-sized enterprises from Germany, Finland, France, Italy, Portugal, and Spain, spread across four sectors. Their finding: across all countries and sectors, ratios of financial structure, i.e., equity and indebtedness, distinguish failed firms most strongly from others. They are followed by working capital, return on assets, sales margin, and cash flow. Rodríguez-Masero and López-Manjón (2020) show for medium-sized Spanish companies that cash flow information can signal financial problems up to three years in advance.
This supports the quick test, which asks for exactly these quantities. At the same time, there are signs that appear only at the margins of the balance sheet or not at all.
- Deficit not covered by equity: If this item appears on the assets side, equity has been used up. This is the clearest warning sign in a small balance sheet.
- Late disclosure: Companies that do not file their accounts on time often have reasons. Check the date of the last filing.
- Sharply rising receivables and inventories at constant revenue: money is stuck, or the customer's customers are not paying.
- Short-term debts rising faster than cash: the customer is increasingly financing itself through suppliers and overdrafts.
- Frequent changes of management, tax advisor, or bank, relocations of the registered office without an apparent reason.
- Letters of comfort or subordination agreements in the notes: the business depends on support from a parent company or shareholder.
- Payment behavior: If the customer already pays later than agreed or asks for deferral, this is more current than any balance sheet.
Rear-view mirror or early warning? Two perspectives
The balance sheet is a rear-view mirror
- Public figures are often one to two years old.
- Small companies do not disclose an income statement.
- Accounting choices and tax planning distort the picture.
- Payment behavior and credit agencies are more current.
The balance sheet is an early warning
- Studies show that ratios can signal distress years in advance.
- Thin equity and long debt repayment rarely change quickly.
- The check costs little and is possible without a service provider.
- It provides a basis for a conversation with the customer.
Both perspectives are justified. Kralicek himself saw the test as a quick test, not a verdict. Payment experiences of other suppliers, collected by credit agencies, are more current and often more meaningful for short-term decisions. The balance sheet, in turn, shows a customer's resilience: how much headwind can he withstand?
I therefore consider a combination right. The balance sheet answers the question of how robust a customer is. Payment behavior answers the question of how he is doing right now. Only both together justify a high credit limit. Late payment and receivables management describes how to keep an eye on your customers' payment behavior on an ongoing basis.
From finding to decision
A poor grade is no reason to decline an order. It is a reason to adjust the terms. Decide in advance how the results translate into payment terms, so that the wish for the order does not decide in the individual case.
| Overall grade | Assessment | Possible terms |
|---|---|---|
| 1 to 2 | robust | usual payment term, credit limit based on credit report |
| 2 to 3 | solid with limitations | usual term, limited credit limit, monitor payment behavior |
| 3 to 4 | little buffer | down payment or progress invoices, shorter term, retention of title |
| above 4 or deficit | at risk | prepayment, collateral, or decline |
Worked example
The example customer with 3.75 falls into the third row. A reasonable offer would be a 30 percent down payment with the order, the rest after delivery with a 14-day term and retention of title. How you justify such terms to the customer without offending him depends on the tone: it is about a fixed rule of your own business, not about distrust of him.
If such a customer comes to account for a large share of your revenue, the risk doubles. Customer concentration risk describes when you should counteract, and When a customer becomes insolvent shows what to do in an emergency. How banks decide on loans explains how banks, conversely, read your own figures.
Scope and limits
Checking customers' figures is part of running a business, not a vote of no confidence. A business that knows its credit risks can be more generous with the customers who deserve it and more cautious with those who need it. The same four ratios are also worth applying to your own financial statements, because that is how the bank sees them.
The limits are clear. The grade levels of the quick test are rules of thumb, not legal thresholds, and they do not fit every industry equally well: a trading business has different typical equity ratios than a machine builder. The studies cited describe statistical patterns in large data sets, not a prediction for an individual customer. And without an income statement, only the equity ratio can be calculated reliably for many small customers.
Conclusion: what a customer's balance sheet reveals
To the guiding question: even without accounting training, the most important warning signs in a customer's figures can be recognized in an hour. Kralicek's quick test bundles them into four ratios, and research confirms that equity, indebtedness, and cash flow in particular signal distress. Because public figures are often old and incomplete for small customers, a direct request for current documents and a look at payment behavior belong to the check.
The balance sheet does not decide on the order; it decides on the terms. If you keep the two apart, you lose no customers, only unnecessary risks.
- Set a threshold for the order value above which you check a customer's figures.
- Retrieve the latest accounts from the company register and note the filing date.
- For large orders, ask the customer for complete financial statements and current management accounts.
- Calculate the four ratios of the quick test and record the overall grade.
- Translate the grade into payment terms using a table defined in advance.
- Apply the quick test once to your own financial statements.
Frequently asked questions
Where can I find a company's balance sheet?
Since August 2022, the annual financial statements of German companies subject to disclosure have been available free of charge in the company register (Unternehmensregister). Small corporations disclose only an abbreviated balance sheet and the notes; micro companies often only a deposited balance sheet. For sole proprietorships and most partnerships, there are no public accounts.
What is Kralicek's quick test?
A quick test that rates a company with four ratios: equity ratio, debt repayment period, return on total capital, and cash flow relative to revenue. Each receives a grade from 1 to 5; the average gives the overall assessment. The thresholds are rules of thumb, not legal requirements.
What is a good equity ratio?
In Kralicek's quick test, an equity ratio above 30 percent is considered very good, above 20 percent good, and above 10 percent average. Below that it becomes poor, and negative equity is considered at risk of insolvency. Typical values differ greatly by industry.
What does a deficit not covered by equity mean?
It shows that losses have consumed all equity and liabilities exceed assets. The item appears on the assets side of the balance sheet. It is one of the clearest warning signs and should lead to prepayment or collateral before a large order.
How current are published financial statements?
German companies must disclose their accounts no later than twelve months after the balance sheet date. The latest public accounts of a small customer are therefore often one and a half to two years old. For current decisions, you should also consider payment behavior and a credit report.
Sources
- German Commercial Code, Sections 267, 267a, 325, 326 (size classes and disclosure, in German)
- IHK Hannover: New thresholds for company sizes in the Commercial Code in force (in German)
- German company register (Unternehmensregister)
- IWW Institut: Quick test, getting an overview quickly (in German)
- Kralicek, P. et al.: Kennzahlen für Geschäftsführer. Redline Wirtschaft (several editions).
- Tascón, M.-T.; Laitinen, E. K.; Castaño, F. J. et al. (2023): Common distress and reorganization patterns by sector and country for SMEs in six European countries using PDFR. Revista de Contabilidad, 26(2), pp. 291-314.
- Rodríguez-Masero, N.; López-Manjón, J. D. (2020): The Usefulness of Operating Cash Flow for Predicting Business Bankruptcy in Medium-Sized Firms. Revista Brasileira de Gestão de Negócios, 22(4), pp. 917-931.
Note. This guide is a general analysis and not legal, tax, or financial advice. The grade levels of the quick test are rules of thumb and do not replace a credit assessment in the individual case.
