Get the answers: Solve the problem of slow and low payers

Dr Mike Ashby. Photo / Supplied

Be firm and dump those who are a drain on cashflow, writes Dr Mike Ashby, director of The Breakthrough Company.

Despite the supposed end of the recession, cashflow remains a problem for small businesses. Is it time to say enough and get tough on recalcitrant customers?

How should small businesses communicate with their bad payers?

There's an old saying: when business is growing, cash is tight. When business is slowing, cash is tight. Cashflow is more important than profit, so business owners have to think about their business in these terms. Owners should be polite but resolute with late payers. You need to stop worrying about whether you'll offend them.

You can do more for your business by doing less business with D class clients - people who are slow and low payers. These people are a drag on your cashflow, your time, your energy, your people, your business. There are two steps to solving this. Step 1: identify your lowest and slowest paying customers. Step 2: fire them.

Write a goodbye letter using words like, "we've been reviewing our business model and have reluctantly reached the conclusion that we can no longer provide the level of service on the current terms and conditions". Either increase the price, change payment terms, or recommend another provider more suitable for their budget. Then watch the income from A class clients increase, profits increase and your stress levels go down.

This is what happens in 99 per cent of the cases of D firing. It only fails if you fail to be polite and firm when firing them. In fact you'll likely find that your Ds turn into Cs by virtue of paying more and on time. Just remember that D stands for desperate - and that's what you were when you took them on.

What if your worst payers are your larger customers?

Bigger isn't always better. You have to persist in trying to get them to pay on time, but you have to reduce dependence on them as a matter of urgency.

Many businesses get taken down by a big defaulter - late payment is a sign of either distress or disorganisation. Either way, they're not an ideal customer and they constitute a big risk. Start focusing on finding A-class prospects instead.

Confusing sales with profit and cash is a fundamental mistake. Bankers tell me that there are still people out there clocking up "sales" even when they know they're going to struggle to collect.

How do businesses increase liquidity in terms of stock and terms of trade?

There are some simple things any business should do on a regular basis - get rid of low-performing stock lines, review terms of trade and review ageing debtors. You've then got to make a conscious decision to focus some resource on it.

Over the last few months one of my staff has politely but firmly worked her way through our debtors. The effect on cashflow has been great.

Right now is the time to get rid of low-margin customers.

* Increase prices so that the margin improves. You have to lose a lot of customers before you start going backwards in terms of profitability.

* Reduce the "cost to serve" so that margin improves.

* If neither of those things are possible, then release them to your competition by writing a goodbye letter.

What are the most important resources you can put into your business?

Uninterrupted time to think.