Sales growth at all costs? Most of the clients that I work with have great sales, are growing revenue, or could grow revenue if they had additional cash to fund the growth. At the same time, every one of my clients is struggling to manage their cash.
After doing the basics of getting their cash management systems in place I almost always recommend that they fire some of their clients.
Yes, fire clients.
These clients are killing the company’s cash flow and slowing or eliminating the company’s ability to grow.
Which Clients Are Hurting Your Company?
There are two types of clients that hurt your company:
Client’s that hurt your profits and cashflow
Clients that hurt your productivity and moral
I’ll focus this article on clients that hurt your profits and cashflow. They are relatively easy to identify and deal with. At the same time, clients that hurt your productivity and moral can be even more destructive because of hidden costs. I’ll take the time in a separate article to teach you how to identify and deal with these “special” clients.
Identify & Work with Clients that Don’t Pay or Pay Late
If you have good bookkeeping it should be easy to run a report each week to show:
If you’ve never tried to collect money from your delinquent customers, the people on the list may surprise you. I’ve worked with clients whose lists of non-payers and late payers included their “best” customers (best only because they were the biggest customers), close friends, people they go to church with, and clients who nobody really knows or remembers.
Clients who don’t pay their bills come in all shapes and sizes.
Here is a 5-step process you can follow when you start to work with them to collect the money that they owe you:
In my experience, taking these two steps will resolve at least 50% of your problems. One client I worked with had never tried to collect money, but then received about 80% of his past due invoices within two weeks of starting to make calls.
If needed, here are a couple of additional steps you can take:
Fire the customers who won’t pay you.
What I tell clients that don’t pay is “Thank you for your business. I’ve really enjoyed working with you. Unfortunately, I cannot afford to keep you as a client, and we will need to part ways.”
Stop taking orders immediately. Tell your sales staff and anyone else who works with that client. Then decide if you want to send the account to a collection agency and try to salvage what you can.
The bigger challenge is what do you do with the clients who always pay late? I’m not talking about two or three days, but two or three weeks, or even months, late. These are never easy decisions, but here are a few ideas:
If you are tight on inventory or labor, then it would make more sense to shift the business to a better client that will pay you. Ship to and service profitable, paying clients first.
Identify & Work with Clients that Are Unprofitable or Break Even
Sometimes a business has clients that cost the business money. They consume more resources than they pay for. Some reasons this is possible are
Regardless of the reason, most of the time you should fire unprofitable clients. Just like the clients who don’t pay or chronically pay late, work with them first to try to move them to at least some level of profitability.
Identifying how profitable each client is may be difficult. It requires tracking that many businesses do not already practice. Here are two ways to ways to identify clients that are unprofitable:
You will need outstanding bookkeeping to do this, including knowing all the revenue, which products each client purchased, and the cost of the goods and services delivered.
Generally, this will only give you the gross profit of each client.
Gross Profit is measure as the Net Sales – Cost of Goods Sold.
If the gross profit is negative it means you lose money each time you sell to the client. Even if the amount is slightly positive, it may not cover the cost of your overhead to do business with the client.
This is a multi-step process. First, get a list of the products the client buys.
Next, analyze the profitability of the products they are buying. It is very possible that not all your products make money.
Finally, add up the profits for the products the client purchased.
Either method will identify unprofitable clients. If you are lucky enough to have all profitable clients, then look at the least profitable clients. If you can find new clients that are more profitable, and have limited resources to grow, than replacing less profitable clients for profitable clients will help you grow the earnings of your business.
Remember, always try to work with clients first. A client is always a precious relationship, even if they are not profitable. You still have your relationship to think about and your reputation in the marketplace.
If you need further convincing of what you should deal carefully with clients you need to fire, read on…
Don’t Give Up Hope
I had to part ways with one of my consulting clients. They were profitable, but each new client consumed a lot of cash and they couldn’t get a credit line. As a result, they were chronically late paying me, they were several months behind on my payments, and we mutually agreed that it would be beneficial to part ways.
I helped them transition my work to someone else and we stayed in touch.
To my surprise, 1 year 3 months and 27 days after my last payment, an unannounced payment arrived in my bank account. 1 year and 18 days later, another unannounced payment came in. Three more payments came in over the next five months until I was paid in full!
I am sure that if I had parted ways on bad terms, I would have never seen the back-payments.
Lose a Client and Gain an Advantage in the Marketplace
Refer the clients who you lose money on to your biggest competitor!
Just a thought….
Cautions and Caveats
Firing a client should never be taken lightly.
Do everything you can to fix a relationship.
If you are not sure about if a client is profitable or not, get some expert help.
So, Who Are You going to Fire?
Did you decide to fire a client? Or have you already fired a client? I’d love to hear the story and the details. I learn a lot about business by understanding the challenges others have dealt with.
Is there a cash management topic you’d like to learn about? Contact me at [email protected] to introduce yourself, share ideas, or ask me questions about managing your business’s cash.
David Safeer help businesses implement cash management systems that create business breakthroughs. He founded The Cash Management Project in November 2018, to help businesses manage and optimize their cash resources. David writes, teaches, and works with diverse companies around the world.
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