Customer relationships are key but dependency upon customers can be suicide. Read on…
Profitable customer relationships
Recently, a business came to me with a problem I see all too often. One of their customers was about to leave. For most businesses, such an event would be a minor set back, but for the company concerned it was a near catastrophe. Their income was dependent on two large customers and half of it was about to disappear.
Customer relationships play an important, and often underestimated, part in the financial position of a business. For SMEs in particular, who these relationships are with and what terms they’re on, has a huge influence on financial health.
Dependencies like the one described are a real danger. They often occur when SMEs deal with customers who are much larger and more powerful than them. Not only can they cause a crisis when a customer decides to leave, they also put small operators at a huge disadvantage when it comes to negotiations about payment terms and price.
Apart from not getting your business into such a position in the first place, it’s a difficult situation to remedy – especially if you’ve just expanded and increased your costs.
So, how do you know when one customer delivers too big a slice of your income? As a rule of thumb, I’d say that if more than a third of your income is generated from one debtor, you’re at high risk. Your business needs to spread its customer base as soon as it can.
When starting relationships with new customers, there are two additional pitfalls to watch for:
1. Don’t over service
This is a common occurrence, especially for SMEs. If you’re a small business who has found a new customer, it’s only understandable that you’ll want to impress and please them. It can be a mistake, however, to go beyond the levels of service that you’d normally – and sustainably – provide.
While pleasing the new customer in the short term, you’ll create unrealistic expectations about what level of service their dollar can buy. As you return to your usual practices, you may end up conveying the impression that your service has slipped.
2. Manage your billing cycle
Traditionally, SMEs have been poor when it comes to accounts receivables. I think there are a number of reasons for this. Operators in small businesses can either feel too busy doing the actual work that makes money, or, especially in the case of large invoices, hesitant and even uncomfortable about seeking payment.
A well-managed invoicing system however, will help and not hinder good relations with a customer. Many under-resourced operators make the mistake of staggering their invoices and delivering them once-monthly. Not only does this create unnecessary delays on payments – when, according to Dun and Bradstreet, the typical company invoice is already paid three weeks late – it can also lead to confusion, and in extreme cases of late invoicing, engender customer resentment.
Issuing an invoice as soon as your service or product is delivered will greatly improve the chances of it being paid on time. It’s also one of the most easily implemented means of making immediate improvements to your cash flow.
Here, chasing up overdue payments is vital. If you’re terminally bad at this, be aware that you can outsource your debtor administration tasks to credit professionals. Many of these services come with additional benefits, such as the identification of credit risks.
So, next time you’re considering the financial position of your business, be sure to take stock of your customer relationships. Having the right kind and the right spread can be the difference between weakness and strength.
To read more Work Your Capital Baby blogs, click here.
Finance expert Rob Lamers is a senior manager at cash flow finance specialist Oxford Funding (a division of Bendigo Bank) and works with companies to put in place better cash flow strategies to grow their business. Over the years Rob has also worked in corporate finance roles with the major banks.