Cash is King. Five Strategies for When Your Customer's a Joker

Back in time, most businesses operated on the basis of extending credit to their customers.  Even retailers.  It was common to be able to “run a tab” and pay off the bill on a regular basis.  Of course, from a retail perspective, this approach has largely been replaced by credit cards.

For business-to-business companies, however, managing credit and collection remains a critical function.  Take for example a service company I know.  Sherry works hard to serve her clients and is responsive to their needs.  Invoicing occurs at the conclusion of a project.  Most of her clients are good payers.  However, we were talking about one that was giving her heartburn.

The client, Candace, and Sherry have known and worked together for years.  Candace’s pattern is the classic “Five-to-five Friday Dump and Run,”  contacting Sherry late on Friday afternoons with a rush job needed for a meeting on Monday.  Inevitably, Sherry would bend over backwards to help her, often sacrificing her own weekend plans. 

Candace was originally a part of a large corporation, so the slow payment habit was as much a function of the bureaucracy and individual attentiveness.  Later, Candace changed jobs.  The relationship followed.  However, the last-minute-rush and payment habits didn’t improve.  They got worse, despite policy and pricing changes to encourage better behavior.  My advice boiled down to one of two approaches with Candace.  First, refuse all future work until paid up and second, move them to a prepaid basis or fire her.  Life is too short to put up with such disrespect and neglect.

Does this sound familiar?  It should.  Beyond the psychic costs of the Friday rush abuse, the financial impact of writing off bad debt is considerable.  According to some sources, the average amount businesses write off due to non-paying customers is between 1.0%  to 1.5% of sales. 

By itself, one to one and one-half percent doesn’t seem like a big number until you do the rest of the math.  First, you don’t get paid for the work and resources you put into delivering your product and services.  You don’t get paid the margin you need to run the rest of the company and have a reasonable profit.  If you’re already running a low-margin business, one or one-and-one-half is significant.  When cash is King and your customer’s the Joker, you’re the one being played.

There are a number of strategies you and your company can put in place to make sure you keep the Candaces and other thieves at bay.  My top five include:

Up-Front Due Diligence: There is an adrenaline rush that comes from making a sale and being of service.  The “people pleaser” in us may believe that the buyer has the best intentions, so we don’t do our up-front due diligence.  This is a big mistake.  Check them out:

• Request a written credit application be completed with clauses that provide for the recovery of any cost of collection you incur in order to be paid
• Request credit references – and then check them
• Check a credit rating service such as Dun and Bradstreet and others
• Check the court systems where available to see if there have been suits filed 

Money Up-Front: One of the fastest ways to verify a new customer’s intentions is to request deposit, prepayment, cash-on-delivery, or a retainer for your product or services.  The thieves balk or, at a minimum, tip their hand as to their credit worthiness.  Consider employing this approach on the first few orders or projects to build your confidence. 

Legal Obligations are Clear: Ensure that your paperwork (website terms, customer sales orders, customer invoices, credit applications, etc.) has clear language in it clarifying:

• Invoice terms – when the invoice is due
• Late payment penalties and interest
• Contract termination/order cancellation clauses and payment obligations
• Dispute resolution procedures
• Rights to recover costs incurred to collect payment, including agency, legal, and court costs 

Hold the Show: If Candace is slow walking your payment, you are well within your rights to slow walk any and all future work, projects, and orders.  Admittedly, this tool should be employed balancing the situations at hand so that the relationship isn’t prematurely damaged.  However, there may come a time where the relationship has become so one-way and abusive that it’s worth the risk. 

End It: Sherry ultimately sent Candace packing, despite their long-term working relationship.  She fired Candace as a client. It wasn’t easy and never is, but there are two tried and true ways to do it.

• The “Yes-But” Approach: -If you’re not 100% ready to end it, the “Yes, But” approach often helps the customer self-select out of the relationship.  The strategy is to agree to the pitch next project or order but change your pricing and your terms, so you get hazard pay and get paid.  For instance, you may double your price, require 75% up front, hold a credit card on file, or other strategies to add a layer of protection to you, your work, and your cash flow while encouraging them to shop the order.  While sometimes the customer agrees, more often they chose to go elsewhere.
• Rip off the Band-Aid – Simply, directly relay to the customer that, because of the payment history, it is best you no longer do business together. While you could also offer them some alternative resources, be careful as to who you send them to so as to not damage your own reputation and friendly-competitor relationships.

At the end of the day, cash is King.  If your customer is playing the Joker, remember.  You hold the cards.  The Joker doesn’t belong in the game.  That money belongs in your pocket.