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Customer Relationships and Financial Health

When it comes to assessing the financial health of your business, an important, but sometimes neglected, part of the equation is the nature of your customer relationships. For SMEs in particular, it is whom these relationships are with, and on what terms, that can have a huge influence on your financial situation.

A common problem for emerging businesses is that their income is often dependent on one or two large customers. If one customer departs, the event can be a catastrophe. If both leave, the consequences are often terminal.

These type of dependencies are a real danger. They often occur when SMEs begin dealing with customers who are much larger and more powerful than themselves. They not only cause a crisis if that customer chooses to leave, but they also put small operators at a huge disadvantage when it comes to negotiations about payment terms and price.

Trends such as outsourcing are making these situations more and more common. Besides not putting your business into such a position in the first place, it’s a difficult situation to remedy, especially if a customer leaves when you’ve just expanded and increased your costs.

Generally, if more than a third of a business’s income is generated from one customer, that is a high-risk situation. There may be exceptions, but in most cases strategies to spread the customer base need to be put in place and executed as fast as possible.

When it comes to customer relations and financial health, however, it’s not only over-sized customer accounts that need to be considered. The actual working nature of your customer relationships can affect your financial situation as well.

There are a few pitfalls to watch for, especially when starting out with new clients.

At the beginning of a new relationship, be sure not to over-service. This is a common occurrence, especially for SMEs. Small businesses who have just secured new customers are understandably eager to impress and please. They make the mistake, however, of over-servicing—that is, going beyond the levels of service that the business can normally, and sustainably, provide.

While pleasing the customer in the short-term, this creates unrealistic expectations about what level of service the customer’s dollar can buy. The danger is that as the business returns to providing the level of service that’s usual, the customer will come to the conclusion that standards have slipped. This is not to say that it’s a bad practice to offer discounts or complimentary services when taking on new clients, just that the customer must be aware that any bonuses are introductory offers.

Another critical element in the relationship is the billing cycle. Traditionally, SMEs have been poor when it comes to accounts receivables. There are a number of causes. Often, operators in small businesses can feel too occupied carrying out the day-to-day ‘cash making’ operations of their businesses to properly manage their billing tasks. At times, especially in the case of large invoices, they can be hesitant and even uncomfortable about seeking payment.

Some operators dislike chasing payments and having stringent regimes of follow up, fearing it will put customers out. Often, however, having a well-managed invoicing system will be a help and not a hindrance when it comes to customer relations. Many under-resourced operators make the mistake of staggering their invoices and delivering them once-monthly. Not only does this create unnecessary delays on payments (when according to Dun & Bradstreet the typical company invoice is already paid three weeks late), it can also lead to confusion and, in extreme cases of late invoicing, customer resentment.

Issuing an invoice as soon as your service or product is delivered will greatly improve the chances of it being paid on time. It’s one of the most easily implemented ways for a business to make immediate improvements to cash flow.

Chasing up payments is critically important. It not only assists in getting timely payment on the invoice in question, it also creates expectations about future invoices and on-time payment. If your business struggles in this respect, be aware that it’s possible to outsource your debtor administration tasks to credit professionals. These services also often come with additional benefits, such as the identification of credit risks.

Taking stock of customer relationships is an important part of assessing the financial health of your business. Managing the billing process is essential to putting in place the right kind of relationships, with well-established payment terms and expectations on either side. Having the right spread in your customer base is even more critical, especially in growth situations where you’re looking to expand. Combined, the conditions of your customer relationships may make all the difference between weakness and strength.

Rob Lamers is from Oxford Funding, www.oxfordfunding.com.au

* The opinions expressed in this article are those of the author, and don’t necessarily reflect the opinions of DYNAMICBUSINESS.com or the publishers.

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