Here’s why you should fire a bad client » SMEInsider

Here’s why you should fire a bad client

SMEs tend to think about how to get their name out there, how to attract customers and how to sell their stuff. One thing they tend to forget, though, is that some customers – no matter how big – might be bad for business.

“We always say, be really, really careful about the businesses that routinely pay after what they’ve agreed to do, because they’re breaching their own terms and conditions and that’s just not good business practice,” says Martin Campbell, Managing Director of Ormsby Street.

“Sometimes it’s not worth doing the deal,” he adds. “Maybe you should find some better customers!”

Campbell believes that far too many SMEs miss out on a key step in the process of winning new business or negotiating a contract: they don’t run checks to see how good that client is when it comes to the payment behaviour and financial health. As a result, he says, they often get caught out by customers with a tendency to pay late – or, worse, are on the brink of going bust – and their cash flow suffers as a result.

“Many small businesses suffer from bad cash flow because they don’t really know what to do in order to improve,” explains Campbell. “Improving your cash flow is the very first thing you need to do in order to free up resources, to invest, to do all the things that you need to do”

Campbell’s company initially tried to tackle this by helping businesses to run background checks on potential clients, with a view to proving that their forecasts were solid when they approached banks for credit. A decade of use, however, has allowed the company to amass a wealth of data on the payment habits of individual companies as well as industries, sectors and general market trends, all of which is fed back into the system to improve the accuracy of the information that users can access.

This means that an SME chasing a big contract with a corporation can now run a credit check on their typical payment terms and whether they have a tendency to break them – and then factor this into both their cash forecast and their negotiations.

If they find that they are dealing with someone who is likely to cause trouble at invoice time, says Campbell, this can help them to make sure that they take preventative measures in advance, such as writing contracts that clearly state their intention to charge interest on late payments, to issue invoices a little early for fixed-cost jobs, or even to ask for part of the balance upfront.

“One of the ways that we’d like customers to start using this information that’s readily available is at the point that they’re doing marketing, rather than at the point where they’re doing sales,” says Campbell.

“Then the small business person can say, okay, I’ve got a lot of sales and marketing effort that I’m going to have to put in to close any of these. I’m going to focus that on the ones where the credit risk is lower and the payment’s going to be better.”

Campbell believes that there is an important distinction to be made between having a client that’s a bit scatty and inefficient on the payment front and one that is actively trying to prolong payments for their own financial gain – and that being able to ascertain which is which helps small businesses to manage their client relationships more productively.

“One of the suspicions that small businesses have is that ‘those big companies are really mean to me because I’m a small business – they pay other people on time, but they don’t pay me on time!’” he says.

“In some cases that’s true and in some cases it’s not. Where it is the case, you want to be fairly hands-on as a small business and go and chase those invoices. Where that business pays everyone late, you’d be wasting your time to do that.”

So who are the worst offenders?

“There’s no rhyme or reason to it,” shrugs Campbell, who says that there are some industry-specific trends and cyclical patterns, but mostly it’s a case of individual companies behaving badly. “I mean, I’ve run small businesses for 20 years – it’s always been an issue as far as I’ve been aware.”

Government agencies, he says, are notoriously bad. “Government, for all that it says, isn’t a very good payer. They issue nice short terms but then they don’t meet them. The personal experience I’ve had of working with government agencies is that there’s a lot of talk of being SME-friendly… but then treating them like multinationals.”

One of his own invoices for a large-scale public sector project was, he adds, paid 18 months late.

Other than neglecting to run checks, small businesses often put themselves at a disadvantage by being too squeamish about money to talk frankly to their clients, says Campbell.

Whereas corporations squeeze on price as a matter of course, SMEs need to learn to politely stand their ground.

“What I’ve seen many times in the business environment is companies that [ask for discounts] as routine, but don’t then do anything. So: ‘Will you give us this discount? No? Okay.’ And that’s typical,” says Campbell, who has also worked “on the other side of the fence” and seen first hand the tricks that corporates view as an easy way to bring down costs.

Equally, he says, companies that pay late often do so because SMEs typically let them get away with it, making it low hanging fruit for firms looking to hold on for credit for a bit longer. The attitude, explains Campbell is essentially: “it doesn’t matter, you’re not going to see any solicitors’ letters or get a court summons because that’s not generally what small businesses do.”

The only way to change these behaviours, he insists, is to have a frank conversation that gives little leeway for breaking the rules, and to make sure that the financial cost of breaching an agreement outweighs any savings.

“Don’t be afraid of this area,” says Campbell. “It’s a piece of doing business.

And if you can have a grown up conversation with your customer about their marketing strategy or whatever it is you’re selling, you should be able to have a grown up conversation with them about whether they’ve paid your bill!”

  • MRT

    The government despite what they say will never come down on the big boys because it’s them that feed them.
    Ironically it is with SME’s money through their late payment.
    A question to be asked “if all major companies (especially in the construction industry) were told to pay all suppliers on time, could they?
    I would suggest 80% plus would have to shut their doors.
    SME’s finance them !!!