There are many reasons to fire a customer. You need to spend your time finding “good” customers AND eliminating “BAD” customers. Today I am focusing on slow-pay customers.
If you are a small firm, the responsibility for collections falls on the principal’s shoulders.
More than likely, the principal is also the chief business development officer. Just think of the time involved in chasing deadbeats.
How can you identify a deadbeat? Late payments and broken promises are a good clue. I trust that you are documenting your follow-ups. Short pays or skips may also be other tactics utilized by deadbeats. Checks mailed without signatures or mailed to a wrong address are other possible clues.
Time is your most precious commodity. You need to invest your time in good customers, good prospects, good networking, and good product development. And certainly you need time for professional development and education. You wear many hats.
You email and/or call the customer. They “duck” your call or they are out on sales calls, which is something you should be doing at this moment. Then they call you back just while you are working on a large new proposal. Stop, lose your train of thought, or worse, make an error in your proposal.
Then the follow-up, as the customer will most likely delay. Send the invoice again, didn’t you receive the check, please look again (and countless other delays, all of which impact your productivity). I am sure that you have heard many of them, and you need to take the time to “resolve” them.
Now, let’s focus on the financial implications.
For starters, your employees are paid regularly and timely (I hope). Similarly, you should be paying your vendors timely. If you are operating at a 40% gross profit margin, that translates to 60% of your sell price paid to others. You are out that money until your customer pays you. If it is a $10,000 order, then $6,000 of your hard-earned working capital is tied up in this account.
If you borrow from your bank, that is at least ½% to 1% per month. If you factor your receivables, the cost is probably closer to 3% per month. Time is not your ally. Interest will accumulate quickly.
And let’s look at the opportunity cost of not having that “profit” in cash. You can’t use it to invest in new equipment or marketing. It is tied up with customers that maybe you do not need.
And now the customer offers to pay, maybe a partial, or maybe by credit card. What decisions will you make? How will that affect your mood in the office or on sales calls or at home? The credit card has other costs associated with it. The partial means that you have to start over to chase the customer.
I had a CEO in banking many years ago who said that he wanted a sales manager who could say no and a credit manager who could say yes. And we all recognize that not every customer will pay timely. If they did, then you may be walking away from some other profitable opportunities. It is a delicate balance.
However, when that one customer abuses your relationship or good nature, it is time to say “You’re fired!”
A 1975 graduate of the Wharton School at the University of Pennsylvania, Harvey enjoyed a 20+ year career in commercial banking, exercising his “golden parachute” in 1996. In his volunteer life, he is a past chair of the Small Business Banking Unit of the American Bankers Association, Easter Seal Society of New Jersey, the SAAGNY Foundation, PPAF EXPO, and Supplier Committee of PPAI. He is also a past President of PPAF. PPAI awarded him the H. Ted Olson Humanitarian Award in 2013.