Credit guru Thea Dudley has spent more than 30 years in LBM credit management. Now she’s here to answer your credit and collection questions. Got a question for her mailbag? Contact Thea at theadudley@charter.net
Dear Thea,
Can the credit department “fire” a customer for slow pay? I spend a good amount of time chasing down smaller volume customers who never seem capable of paying on time. It’s a chronic issue and the customers take up more time than they are worth. I would like to show them the door. My sales guys freak out, saying it is still a sale.
Signed, Turnin’ ‘um loose in Tulsa
Dear Turnin’ Loose,
Firing seems harsh. I prefer to think of it as releasing someone into their natural habitat to find their smile somewhere else. Generally speaking, if someone is high maintenance with sales, they are usually high maintenance for credit as well. When I refer to “high maintenance,” what I mean is these customers complain about everything, pay super late, ask for discounts, skip finance charges, and fuss to me about pricing, quality, and anything else to keep the focus off their account balance.
These are the kinds of accounts in which you have to make multiple phone calls just to get a payment that was due three months ago. Then the customer is upset that you are calling right after that payment asking for more, because “geez, they just paid you.” Yes, yes you did, but that was a payment that was due three months ago, so you have some catching up to do and we would like our money now, please.
I used to have a horse that was absolutely beautiful. I was so excited to have her. The operative phrase here is “used to have.” Whenever I went out to ride, there was always an issue so I couldn’t ride that day. She threw a shoe, kicked a hole in the stall so I had to spend my time repairing it, she was limping, she bit another horse so I spent time on that horse, you get the picture. It was always something that contributed to me having to suck it up, deal with it, alter the original plan, and hope for a better tomorrow.
After awhile my husband asked me what I was getting out the relationship. I had to admit that while I loved the occasional ride and getting to say I had this beautiful horse, the amount of work and effort it took to keep said beauty didn’t balance out in a rewarding relationship for me.
This is the same feeling with the chronic slow-paying, low volume, low margin, high-maintenance customer. The addition to your sales goal dollars may be attractive but if the profitability is not there, it is just busy work. Who needs that?!
If you would like to intentionally “shed” those customers, you are going to want support from both the sales rep and the top execs. Best way to go about it is logically with support from the numbers.
You will need to calculate the margin you are making off the customer. Add to that the carrying costs. Then calculate what each credit call costs, how many calls it took (these will be a little harder so assign base points to), and the amount of time looking to see if payment was made. If the carry cost was say 1.5% per month, then another 1% for each call, message left, or email, add all of that up. Once you deduct those costs you will be closer to the real cost of doing business with this customer. Then you can decide if the customer is worth the time and effort.
Once you can get those calculations done and everyone is (mostly) in agreement, you can explain (after your last payment) to the customer that this relationship is not working out and tell them why. Say that while you enjoy having their business, the cost of keeping their business is just too high for you. Relationships are a two way street. If only one party is doing all the giving with no rewards, it is not a healthy, profitable relationship.
This conversation is not for the faint of heart or sissies. People don’t like being told they do not pay well and that you are choosing not to play that game. While it will be a difficult discussion, you may be able to get good conversation going with the customer, work through the challenges, and keep the customer with much more profitable results.
Like many things, credit is a privilege and while we all want sales, not every sale is a good sale, contrary to what some may think. It could be time to put that customer out to pasture and just enjoy them from afar, in someone else’s field.
