Do you make it a point to track your customers’ order patterns? More importantly, do you know your sales cycle times and how some customers may simply be trying to extend their credit & terms by spreading out purchases amongst multiple vendors? If not, then it’s about time your company become more aware of the practice. It’s an approach many companies use to extend their credit and its one that becomes more prevalent in difficult times. By spreading out purchases, customers are able to max out one credit limit before moving on to another. Unfortunately, your company may be the next in line!
Reducing Your Costs of Capital
When you track your customers’ order frequency, you are better able to gauge their true intentions. The question you must ask is the following; Is your customer placing an order with your company because you’ve offered the best solution, or are they doing it because they’ve already maxed out their credit limit with your competition? If you don’t protect your company’s interests, you could be finding yourself with receivables your customer has no intention of paying. This is why so many business professionals say that a sale is never a sale until the customer pays their invoice. So, given the severity of the practice, what must your company do to avoid this situation and most importantly, what must you look for?
- Track Customer Order Frequency
Regardless of what industry or market your company operates in, you must be able to track your customers’ order frequency. It’s about understanding your sales cycle times and ascertaining whether a customer is coming around when they should, or if they are trying to max out their credit limit before moving on.
- Define the Customer Relationship
What kind of relationship does your company have with this particular customer? Have they been difficult to deal with in the past and unwilling to give your company business? If so, why are they coming to you now? In difficult times, it’s those difficult & hard to please customers who’ve never given your company a chance in the past, who now seem more than willing to give you some orders. Understand why they’re buying!
- Constantly Update Customer Credit
Your company has the tools to continually update its credit references on all customer accounts. Make it a priority to periodically check your customers’ credit. In addition, have your salespeople be more cognizant of their customers’ actions. When the company’s accounting department and its sales team work together on these issues, they are both able to avoid these situations before they take hold.
- What Are You Hearing?
The best source of information is always from the market itself. This includes other customers, and in some cases, competitors. Keep your ear to the ground. What are you hearing about the market and its players? Are certain geographical regions of the market, or certain customers, having a hard time meeting their financial obligations? If so, what does this mean to your account list? Watch for signs that customers may be in trouble and gauge the sincerity of the source of that information.
None of this is easy. After all, in bad economic times, nothing is more uplifting that to secure business. However, it’s essential to protect your interests, and that requires your company be cognizant that some customers may not be sincere in their practices. By no means am I implying you should be able to pinpoint these occurrences immediately. However, when all of these factors occur at the same time and are substantiated by credit checks and other sources, then it behooves you to be aware that something might be amiss. Here are some possible solutions to protecting your company’s interests.
1. Buy Receivables Insurance
Receivable insurance allows your company to be protected in case one of your customers is unwilling or unable to pay their bills. Granted, your company must have relatively healthy gross profit margins to support the costs of the insurance. It’s an expenditure that can erode some of your profit, which makes it difficult for those companies with razor thin profit margins. However, it also protects your company in case of customer bankruptcy and doesn’t leave you holding receivables that can’t be paid. To read more about using receivables insurance, please read: Best Business Practices: Insuring Customer Receivables
2. Use Receivables Factoring
Factoring isn’t what it used to be. It isn’t some obscure method of financing a business. In fact, given the recent global recession, it’s become a dominant financial tool for business in all kinds of markets. Factoring works by allowing companies to use their receivables as collateral. Once a customer is invoiced for a given purchase, the company can then sell that invoice to the factoring company, who in turn proceed to collect directly from the customer. Once the invoice is closed, the company is reimbursed the difference between what was initially advanced and what their customer finally paid. There are fees, but they have become very competitive given the lack of available credit.
The table and video above are taken from the post: Sample Receivable Factoring Excel Sheet: Effective Rates & Interest Rates
Customers who extend credit and terms by spreading out purchase orders amongst multiple vendors, are trying to avoid insolvency and ultimately, bankruptcy. Some may be able to avoid this fate, but a large number of them won’t. These issues have become far more prevalent in today’s economy as every company has seen their financing costs increase on business credit lines and loans.
It’s a cascading effect, one where a single late customer payment leads to another late payment. With a lack of viable financing options, some companies resort to extending their credit across their entire vendor base. Be aware that this occurs and watch for the warning signs that your customers may be pursuing this practice.
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