Protecting your business from risky clients

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We just got clobbered by a client who went under, taking our receivables with them. We’ve gone from having tons of money in the bank to being very thin. Since this was a sizable account, it’s going to be hard to replace. We want to learn from this experience. What should we have done differently – so we can do it right next time?

Thoughts of the Day: Big clients can help boost the business, but they can also be dangerous. Make sure you have a good handle on what’s going on with every customer. Build in protections for things that might go wrong.

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Big clients are tempting. Less sales effort, more sales volume, revenue growth. It’s all good, right? Wrong. Big clients also can put downward pressure on profits, shift your focus away from building other clients, and if they decide to leave, they can leave a big hole behind.

Work on reducing the effort and cost of acquiring new customers. Test to find repeatable marketing campaigns you can rely on to build your sales pipeline. Document and continuously measure what’s in your company’s sales funnel. Get to the point where, at any time, you can open the floodgates and replace any existing customer without sweating the details.

Assign a point person to every customer. Ask for call reports to insure that someone from your company is regularly talking to every client’s buyers and the people who pay the bills. Build relationships with people who can get the invoices paid.

Put customers on a “red alert” list if invoice aging starts creeping up. Every customer should have a valid credit card on file, with signed authorization to use it, in case invoices go 60 days past due. Regularly check the credit of larger and riskier clients, and verify that credit cards on file are still valid.

Cut customers off and hold up future work as negotiating leverage to get paid. Unpaid bills are “sunk cost” – that is, they are worth $0 until a payment is received. Never let a customer fool you into doing more work in order to get an old bill paid. Instead negotiate for payment on past due invoices plus money to put towards new orders.

Get control of your business’ financial picture. Build a budget, a cash flow statement, and a sales forecast. Get a credit line in place, and learn how to use it wisely. Have a plan to get debt free. If you’re unsure about what to do, ask an expert to teach you.

Cash reserves are any businesses’ number one protection from things that might go wrong. 3 – 6 months of overhead expenses, set aside in a savings account, will go a long way to keeping your business safe under the worst of conditions. Put away a few dollars every week, to build up reserves.

The finance function of any business requires a lot of different skills. Make sure you have the bases covered. Use outside resources such as accounting, bookkeeping and financial analysis firms to fill in gaps. Transition tasks to internal staff as the business grows

Most entrepreneurs are sizable risk takers. Learn to moderate risk taking. Have someone else in the business who can sound alarms, be a voice of caution, with the clout and stamina to stand up to you when your risk taking gets out of hand.
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Looking for a good book? Try “CFO Techniques: A Hands-on Guide to Keeping Your Business Solvent and Successful“, by Marina Guzik.

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