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How to spot a business-wrecking customer

Monday, 11 April 2011 | By Colin Porter
When you start a business, it isn't just about what you do well that ensures your path to success, but also what your customers do well.


This maxim is increasingly relevant. Late payment has climbed sharply over the past year, leaving many small businesses in debt and causing severe knock-on cashflow problems in supply chains across Australia.


This worrying trend should put you on your guard when accepting new business or dealing with existing customers who don’t feel any urgency in settling their debts.


Don’t fall into the trap of accepting any client because you're desperate for business. If you are careful and patient at the beginning, it will pay dividends for your business and your reputation in the long run.


At best, the wrong customer is a passion killer. At worst, this person can be a nightmare combination of someone who undermines confidence in what you do, bullies you into accepting unsuitable payment terms and refuses to pay if you don't deliver impossible milestones.


The first thing at stake is your business’s reputation. If you have the 'wrong' customers on your books, you run the risk of having to meet the needs of a client who you can't serve well.


If word gets out that you can't deliver, your reputation sours even if it was a bad choice on your part to accept the work.


In some cases, an unsuitable customer stifles your business growth or leads it in a direction you're not keen on. If you serve an unsuitable client well, your business will grow in the wrong direction as more of those clients flock to you.


Non-paying or slow-paying customers will hurt your cashflow. Cashflow is the cycle from when you pay your outgoings to when your client pays you: the shorter the better from your point of view.


Even profitable businesses can fall over without a healthy cashflow, so it's important that you're paid as soon as your invoice falls due, which often means managing your client to achieve this.


Follow these three key rules to ensure your customers build, rather than break, your start-up:


Rule 1: Only accept customers you can handle.


Many start-ups find themselves saying 'yes' to someone who may prove more trouble than they're worth because they just want the work.


Unfortunately, some established businesses take advantage of this, resulting in a 'David and Goliath' situation.


Can you handle the workload they give you? Can you meet their quality standards? Can you stand up to them if things get out of hand? It's important that your business is a match with your customers because if you cannot meet the workload or standards they set, your reputation could be at stake.


Rule 2: Research your customers.


Many new businesses fall into the trap of accepting bad customers because they don't realise what makes a bad customer.


You should identify what you don't want in a client. Some of these traits may be universal, others may be specific to your preferences and your business.


Look beyond the brochures and website and find out what your customer is really like. Ask for a meeting before you start work and find out your key liaisons and who makes the decisions—these may not be the same people! Identify any potential problems and consider solutions.


If possible, find out who else they work with and get a testimonial. Don't forget to ask the provider questions that will reveal whether this client will suit your style of business.


Lastly, no matter how big or seemingly reputable they are, invest in a credit check. You'd be surprised at the size of the companies that are on Australia's worst payers list.


If your investigations turn up any of these traits, consider it a warning sign of a bad client:


  1. The client doesn't brief you properly. If you start work and the client is vague or disorganised about what they want from you, this can lead to problems. The danger is that you initially scope the job, not know if you've met requirements, and finally are unable to invoice them correctly. This is where meeting and understanding the client and how they operate can help.
  2. High turnover of suppliers or service providers. If the business can't keep a supplier for more than a few months, you need to find out why. This is where testimonials can help.
  3. Failure to comply with agreed credit terms. If you're already doing business with the client and they don't meet your set credit terms and they are not willing to settle the invoice another way, or offer unlikely excuses, this is a red flag. This is where credit checks can help.

Rule 3: Don't be afraid to seek recourse.


So you've accepted a client and everything has thus far gone well.


Then something changes; maybe a key person has been replaced or the new financial controller has implemented new payment processes that seriously jeopardise your cashflow. What do you do?


If the work itself has changed, find out why: is it a new person? A new direction for your client? If it is a new person, take the time to meet with them and find out how they will interact with your business, then recalibrate your expectations of the client's mode of business.


If the client pulls you in a new direction, decide whether this is a move that fits with the scope of your business.


If you decide to follow, make sure you understand the implications for your business: you may need additional training or more staff, for example.


If you don't want to move in a new direction, part ways in the most agreeable way possible. Explain to them where you see both businesses and point out that you prefer to remain where you are.


They will respect you for your insight and may continue to offer you work in your core niche. If you don't make a clean decision, you may find yourself out of your depth and unable to cope with the new work, which will affect your ability to deliver.


If payment processes have changed out of your favour, discuss this with the financial controller as soon as possible; it may be possible to gain an exemption.


If processes have changed without warning, or perhaps illegally, make your client aware of the agreement you set at the beginning of your relationship.


If the situation doesn't change, seek guidance from your own accountant or a creditor management agency. As a last resort, pursue legal avenues.


Lastly, if it really isn't working out, don't be afraid to break up with a problem client. Have the conversation with them as soon as possible and outline the reasons why you can no longer work with them.


Be diplomatic and courteous, and stick to your guns. After that, they're someone else's problem.


Colin Porter is managing director of CreditorWatch, an online community of thousands of businesses who share information about bad and slow payers to make better credit decisions.