Small Business Taxes & Management^TM--Copyright 2013, A/N Group, Inc.

Fire your client? In this environment? Maybe. More than likely you have at least one, probably more, clients or customers that are more trouble than they're worth. Here are some signs:

• They purchase your lowest margin services or products.
  
• They're the only ones who purchase a particular product or service.
  
• They complain about price and always ask for a discount.
  
• They pay late, or, worse, pay late and take a discount for early payment.
  
• They argue about the bill, claiming short shipments or defective products, when you know that's not true.
  
• They ask for custom work, then refuse to pay for it, or pay less than what it's worth.
  
• They're a credit risk.
  
• They require more support than any other customer.
  
• They bad mouth you in the industry.
  
• You can't trust virtually anything they say (e.g., promise follow-on business, but never produce).
  
• They take time and energy away from more profitable customers.

Often there are other signs, some of which may be unique to your business.

While these customers provide additional revenue, they contribute little, if anything, to the bottom line. In some cases you actually lose money on their business. In addition, they often negatively impact employee morale by stressing employees.

While this is a difficult environment to consider dropping a client or customer, it could be in your best interest.

Before asking the customer to take his business elsewhere, you should try to reform him. Refuse to provide a discount outside of the norm, tack on a late payment fee for payment beyond the stated terms, etc. There's a chance the customer is just pushing you and knows he can't get a better deal elsewhere. In fact, the reason he's sticking with you is that he's been fired by other vendors. Pushing back may bring him into line to the point where he may still be a nuisance, but much less so. In fact, there's a good chance that'll happen.

Before you make the decision to push him out consider what the loss of the business will mean for the firm. Rank the customers based on these criteria.

Size of customer. At some point, the customer will be so large that the impact of the lost sales will have too much of an impact on the business. You've got to consider your fixed costs. For example, Madison provides 20% of your sales and only 1% of your profits. On a profit basis you should get rid of them. But you'd have to lay off 20% of your staff and you're still have to pay rent on the unused 20% of the office space and warehouse space. While it may not make sense to fire the customer, you should make a sincere effort to replace him.

Credit risk. This one is critical. You may have good customers that want to pay on time, but have their own cash flow problems. A credit risk is even more of a problem if his business carries a low margin. The problem is what do you do if he's already owes you a bundle? There's no easy answer. Some businesses put the customer on CBD--cash before delivery. Another approach is to have the customer clean up old bills little by little while paying cash for all new work. If you push the customer you may get him to rob Peter to pay you. Caution. If he goes bankrupt creditors may try to recover from you claiming preferential payments.

Customer profitability. While analyzing each customer may not make sense, you probably have a good idea who will make the cut list. Take the customers on the list and rank them as to profitability. Customers where you're actually losing money clearly are the first ones to cut.

Special services. Customers who require special services, extra time, etc. where the price isn't commensurate with the cost and particularly those that negatively affect other customer orders should be considered for cutting.

Liability issues. Whether it's a product or service, liability issues should always be considered. If you've got a good chance of getting sued for the product or service, you either need to be compensated for the risk, or avoid it altogether. Insurance may offset risk, but it won't be long before your premiums will rise. Some years ago one industry realized they were getting sued just as often for their $5,000 products as they were for their $60,000 items. While the $5,000 products outsold the more expensive version by a factor of 20, they made just as much money selling one $60,000 item as 20 $5,000 ones. They cut production of the cheaper versions to the bone and raised the price substantially. Sales of the cheap units declined precipitously but overall profits jumped as a result of the higher prices.

Production or service capacity. It probably doesn't make sense to boot customers who use excess capacity that would be difficult to sell. For example, you happen to have an in-house designer who has special skills that are essential for a client you can't afford to lose. But the designer has free time that can be allocated to a customer you would not otherwise keep. The issue is probably more important if you're a manufacturer with a production line that has high fixed costs.

Building (or retaining) expertise in the area. Sometimes you want to gain experience in a new or specialized market that could be more profitable than your regular business or allow you to grow. Work for a customer that can generate the expertise and add to your resume for future sales should be considered valuable.

Support. Some customers require far more support than others. It could be change orders, arguments over pricing, delivery, or product quality (when you know there's no issue), etc. Such issues not only consume a lot of staff time, they also have a morale impact on employees who have to work with them.
Cross-selling. You've got to analyze all the customer's business. It's not unusual that the customer brings in a good deal of profitable business along with the unprofitable component. If that's the case, you can't get rid of the customer but you may be able to discuss the losses you incur. You may be able to increase prices or even convince the customer to accept a different product or service to replace the unprofitable work.

What to do. There's no rule of thumb here. It depends on the problem and the size of the customer. For example, if the problem is slow pay, for small customers you can just refuse to ship until they're paid up. The same approach may work for larger customers, if you have the leverage. Alternatively, you might try a price increase to offset the higher cost. If the problem is profit margins on the job and the customer is substantial, more analysis is required.

Worried about the customer going elsewhere? Sometimes that's a good thing. On more than one occasion, we've seen problem customers putting a job out for bid and the low bidder having so many problems the job caused major problems for the competitor's business.

--Last Update 09/30/13