Fire “Loser” Clients or Keep Wasting Your Cash
Sales growth at all costs? Most of the clients 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.
Which Clients Are Hurting Your Company?
There are two types of clients that hurt your company:
1. Client’s that hurt your profits and cashflow
- Unprofitable or break-even margins
2. Clients that hurt your productivity and moral
- Complainers that are not constructive and just make life miserable for you and your employees
- “Special” clients with constant special orders, instructions, one-off requests, and unique demands
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:
- Who owes you money?
- How long have they owed you money?
- How much do they owe you?
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.
1. Make a very friendly phone call. Confirm they received the invoice and ask if they have any questions about it. Fix any problems with the invoice that the client identifies and re-send it immediately. The corrected invoice will still be due on the original due date.
2. Ask them to pay their bill. Ask nicely. Many clients won’t realize that the bill is past due and remember, you want to turn this non-paying or slow paying client into a client who pays on time.
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:
3. Arrangements for payments. If your client cannot pay the entire bill immediately, ask them how much they can pay now, and how much can they pay each week (not each month.) You will usually get a good response out of this. While you don’t want to become a collection agency, this is a good strategy if you think that the relationship with this client can be salvaged.
4. Escalate. If you are not doing it already, ask to speak to the highest person at the company. Talk to that person. Sometimes this will get action. If not…
5. Let them know you can’t afford to do business with them. Let the key person know, again nicely, that you just cannot afford to continue working with them as a client. If you are a key supplier, this may get them to start paying, but if it doesn’t…
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:
- Identify how profitable the client is. If the client is very profitable, you can count this as a cost of doing business. If they are not, you should fire them. (See more on non-profitable clients below.)
- How badly do you need the business? If you have excess labor capacity and/or inventory, then it may make sense to continue selling to the client, just as long as they keep paying regularly, even though they are always late.
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.
- If this is not a client that you enjoy working with, then the decision to fire them becomes easier.
- If you like this client, maybe taking them to lunch and explaining the situation could help. Look for a win/win solution to improve when they pay.
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
- Special discounts
- Product mix
- Extra unpaid time spent on projects
- Excessive returns
- Employee dishonesty
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, then 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?
This complementary article, What every CFO needs to know about the tech revolution in Accounts Receivable,includes further receivable management techniques to improve your cash flow.
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