Who’s your most profitable account?
The most common ranking of customers is by percentage of sales. Most businesses have a few standouts. What makes them so?
It is not always the size of their operations. Your product may just suit them perfectly. Or the sales team on that account delivers a superior service. There are other reasons. Maybe you do not monitor their receivables closely, and they know that you help their cash flow by allowing their account to age out to 90 days, when others are paying on time.
All these things have costs associated with them. Maybe it is free add-ons or complimentary backup services that make your product the perfect one. That costs money. The sales team may be your most expensive. Those cozy payment arrangements can be costing you in working capital and overdraft expenses.
Try ranking your customers on their net contribution to profitability. How do they stand on a fully-costed basis?
There are good reasons to do this.
Firstly, you will get an accurate assessment of exactly whom your best customers really are.
Secondly, if it turns out your best customer is your best customer, it will highlight the sort of service profile, and cost profile, that generates a great customer. Can you extend this model to other market segments to create more “best” customers?
Thirdly, it will make clear the real relationship between sales and cash flow.
This last point is often key to getting your terms and conditions right. In an ideal world, the nearer your match the payment terms of your receivables with the payment terms of your payables, the lower your working capital requirements – you either have a lower overdraft or more money in the bank.
Servicing a top customer often increases inventory costs because service can be a function of prompt delivery. The danger is simply stocking up to ensure delivery without monitoring what that it is costing to hold that surplus stock.
What are your options?
The obvious one is to set your payment terms as near as workable to the timing of your outgoings. But that can be a sensitive issue. Don’t expect your sales teams to be your closest allies on this. Nonetheless, commercial terms are a fundamental pillar of good business, including risk management. If a “best” customer gets into financial trouble owing your three months of receivables, the impact can be harsh. It pays to keep them at a sensible level, even if it pays to offer them some concessions.
There are other options. They include staggered payments that bring in some cash up front. Demand management – working with suppliers to match stock levels with cyclical shifts in your requirements – can shave inventory expenses. Service and maintenance add-ons lend themselves to “up-sizing” sales or building in steady retainer income.
Ranking your customers by their actual contribution not only concentrates your activities on optimizing those relationships. It opens up strategies for building a stronger stable of “best” customers across your whole business.
For a quick test of your terms and conditions, go to the Recharge Workshop and download the module called “Creating a functional credit policy”.