Lee Rust, Florida Corporate Finance
Most company executives and managers spend a significant amount of time attempting to increase their customer base and sell more stuff to more people. They never think that some of those customers, including some they’ve had for years, may be unprofitable. Get rid of those and sales will go down, but profits will go up.
Several years ago, I did some strategic planning for a small steel fabrication shop. Their largest customer was particularly demanding, not only as to deliveries and quality but as to prices as well. That customer never missed an opportunity to demand a price cut. Because they represented over thirty percent of the company’s annual sales, the owner and sales manager continued to give on those price demands. That company filed for bankruptcy reorganization and was eventually liquidated.
At the time, I also happened to be involved with the fabrication shop that took over that customer and its fabrication business. At the start of that relationship, they sat down with the customer and went through a comprehensive list of the components to be manufactured. They raised prices in varying amounts for every piece. When the customer replied that they could buy an item cheaper from another supplier, the answer was, “Fine, you should do that.” That company still manufacturers the majority, but not all, of those parts and generates profits not only on the work for that customer but also for their company as a whole.
There are a number of reasons that you might consider firing a customer. If you deal with a company which is chronically late paying your invoices, you should ask to have a copy of their financial statements. If those late payments result from a poor financial
condition, don’t think of the effect on your revenue of losing that customer. Think about the effect of taking a bad debt loss on their entire receivable. You can’t afford to deal with a customer who might not pay at all.
However, if that customer’s financial condition does not appear unduly weak, simply tell them that you want a written agreement as to extended payment terms. Then calculate your cost of carrying that receivable beyond thirty days and add that cost to the prices
charged that customer. If they don’t want to accept the price increase, ask that they pay on time. Your company is not a bank for your customers.
By the way, if a customer with a history of late payments will not give you their financial statements, that should be enough reason to consider firing them.
The rule is simple: If an account isn’t profitable, you shouldn’t have it. Why pay your customer for the privilege of servicing their account? Rather than lose money servicing any customer, let your competitors do that. Your company will be stronger; your competitors will be weaker.
Of course, price and profits are not the only consideration in a customer relationship. Some people are simply too ornery to deal with; a chronically unpleasant customer is one which should be suspect.
At least once a year, every business owner or CEO should review with their sales managers their entire customer list. Fire those that shouldn’t be on the list. The object is not to maximize revenues; the object is to maximize profits. And don’t forget the old cliche;
you can’t make up for losses by increasing your level of sales.
Previous Article
Next Article