Catch Phrases Every Small Company CFO Has Heard (and Uttered)

Catch Phrase #1:  We can’t cut that customer off. They are our largest customer!

 CFO’s Response: We are throwing good money after bad!

 While catch phrases always contain an element of truth; using them as a justification for a business decision can sink a company. Catch Phrases and the CFO’s Responses are usually based on the different motives and personalities of the players involved. Avoiding the “sound bites”, understanding the underlying motivations and fears of each member of the team always leads to better outcomes.

Putting (or not) a large customer on credit hold is always an emotional decision.  

The larger the customer is as a percentage of the company’s total revenue the more emotional and critical the decision is.

  • The salesperson usually is facing a loss of personal income due to lost commissions and may; like the owner, have a long and personal relationship with the customer which could be permanently damaged.
  • The company president may feel an empathy or “brotherhood” with the other owner and without this major customer his own business may suffer.
  • The CFO is getting heat on the past due receivables and may be facing vendor or bank issues due to the uncollected cash.

First: the team must agree that collections and sales are more art than science and there will either be a “long-game” (collecting the money and retaining the customer) or a “short-game” (collecting the money and losing the customer).

Second: get a clear, fact-based understanding of why the customer is not paying their bills.

  • A temporary problem or permanent one?
  • What are they doing to resolve it?
  • Is there something we have done wrong and they are refusing to pay until it is corrected?
  • Do they have the time and resources to fix their problem before it is too late?
  • Are they just “testing you” to see how long they can stretch you out?

Third: the team needs to make an educated assessment on the probabilities:

  • The customer is not going to survive.
  • That if uncollected, the amount would do serious damage to your company.
  • The client is being dishonest or doesn’t have the willingness to pay you.
  • You are in a race with other vendors and creditors and there is not enough money to go around.

If any of the above are highly probable it is almost always best to play the short-game and do what it takes to collect the money as quickly as possible.  This is no time for emotional decision making.

If it is probable that the customer can work through their issues the team must develop a long-game and collectively stick with it. Think chess. Each decision and strategy should balance the collection of money with the future customer retention and customer motivations.

  • Each team member needs to cede their own ego and individual motivations, as no one will likely be completely happy with the plan.
  • Usually a middle ground strategy with a set payment schedule, payment guarantees or collateral and an understanding and limits on new purchases produces the best long-term results. 
  • Flexibility but consistency from both the company and the customer are needed.

I’ll Leave You With This….

Once the team has developed a collection/customer strategy the best results have been when the finance group is tasked with the implementation and other team members are taken out of the collection process.

  • In credit decisions always think in terms of risk verses reward. High margin sales allow for more customer leeway than low margin sales. Write-offs of high margin sales is a write-off mostly of profits you would have never had if you put the customer on credit hold. A write-off of a low margin sale means you now have to find the money elsewhere to pay the suppliers of the materials or payroll costs to create the good or service sold.

For more ideas, information and assistance with credit decisions or collection strategies please feel free to contact us at IFI