It can be enormously difficult, especially for smaller businesses in industries based on relationships and trust, to make the decision to cut loose a customer whose credit risk has soared.
It’s not a decision that should be made lightly or casually, but once made, it should be firm and straightforward to protect the business interests of everyone involved.
After all, the income and creditworthiness of the company owed money are at stake too.
Before making a final decision, however, it’s best to be forthright and open with the poor-performing customer: communicate clearly and directly on the nature of the problem, making expectations clear.
Of course, all communications should be polite, firm, and avoid judgment or unprofessional language, with a focus on setting definitive next steps.
If there are significant receivables, exhaust all options for collection. To preserve the relationship, try to work things out as directly as possible. If this is no longer possible, then pursuing more formal options or legal action are the next step.
While these alternatives should be a last resort, they are a useful tool, especially to prevent the same actions being taken on the company owned money.
Before sending an email or letter, or making a last resort phone call, it can be useful to prepare a script to stay the course and not get lost in irrelevancies or distractions. And if the relationship is severed, there is much more work ahead.
Reevaluating processes
For a company on the losing end of receivables, it may be time to reevaluate the methods used for determining customer creditworthiness. Examine how this determination was made in the past and unearth any flaws in the process that left the company vulnerable.
When it comes to replacing the lost customer, a return to the basics—such as using the many readily available and often inexpensive tools for determining a customer’s credit risk—is a good place to start. Asking for and thoroughly vetting references is another frequently overlooked practice.
Another step is to measure internal costs by evaluating the customer acquisition process and a prospective customer’s lifetime value.
Performing a cost-to-serve analysis can help determine the total expenditures involved in gaining a new customer, as well as the planning, sourcing, delivery, returns, and any other aspects involved. Of course, this may vary from customer to customer depending on the nature of the business.
But don’t neglect the opportunity to build volume with existing, well paying customers. According to the 2015 book Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, businesses have a success rate of 5 to 20 percent when selling their products or services to new customers, but a 60 to 70 percent rate when selling to existing customers.
This is an excerpt from a Credit and Finance feature in the November/December issue of Produce Blueprints Magazine. Click here to read the full feature.
