How to Protect Your Profits
When Big Customers Pay Late
By Scott Simpson, CEO of BlueTarp
T
Know Your True
Cost of Credit
Hard Costs
• Cost of money
• Cost to collect
• Bad debt
• Bureau & data costs
• Billing costs
• Legal expenses
Soft Costs
• Owner time
• Missed opportunity of
how you would have
used the cash
he big whale!
Everyone loves landing the big whale, that large
customer who puts an upward kink in your sales and
gets you buzz in the marketplace. You worked hard
cultivating that relationship and now they want to give
you a try. You ask your credit manager to set up their
account and she comes back with a less-than-stellar
report: Your prospective customer has a somewhat
spotty credit record and chronically pays everyone
slowly.
Do you turn away the business? You don’t have to.
The key is to make integrated sales and credit
decisions, not separate ones. Dealers know their
cost of goods well and are often precision-like in
understanding how to give price breaks and still make
positive gross margin. However, most dealers ignore
costs of credit and how those costs can vary widely by
customer.
Bill Lee, LBM industry veteran, reports that the fullyloaded cost of credit for most dealers is between 3.5%
to 5% of sales. If that number sounds surprising, it’s
because those costs are not contained on one line of
your P&L but spread out across it. Costs of credit are
How to Protect Your Profits When Big Customers Pay Late
not just the legal bills and bad debt on a small number of accounts but also
the cost of money and cost to collect payment on all accounts. For dealers
who have higher delinquencies or have contractors taking them out 60, 90
or 120 days, those costs can really add up.
So—if your large prospect pays everyone else slowly, how will they pay
you? You got it. They’ll pay you slowly too. Knowing this, factor it into your
pricing upfront.
Let’s use an example.
Say your average customer spends $100 and nets $25 in gross profit, or
25%. When you factor in warehouse, delivery, sales, administrative and
financing expense, the net profit of the average customer is 4%.
HOW SLOW PAYMENT IMPACTS CUSTOMER PROFITABILITY
Revenue
Costs of Goods Sold
Gross Profit
Gross Profit %
Warehouse
Delivery
Sales
Administrative
Financing (Bank Line)
Total Operating Expenses
Net Profit
%
Average
100
75
25
25%
Slow Pay
100
75
25
25%
Adjustment
105
75
30
25%
5
8
5
2
1
21
4
4%
5
8
5
5
4
27
-2
-2%
5
8
5
5
4
27
3
3%
2
How to Protect Your Profits When Big Customers Pay Late
Let’s also say you have a line of credit with a 6% interest rate annually,
or 0.50% for every month. Someone who regularly pays you 60 days late
is costing you 1% more in borrowing costs (2 extra months * 0.50%).
That means this customer is occupying more of your credit manager’s
time by requiring check-ins and collections calls. You are spending more
time internally discussing this customer, and you and your sales reps are
reaching out to check in on payment too, taking more valuable time away
from growing your business.
The 80/20 rule generally applies here – 20% of your customers are
occupying 80% of your time. The time lost isn’t fake money – you are
paying yourself, your sales reps, and your credit manager real money and
this is where they will be spending some of it to the exclusion of other
work. When you add it up, rather than having administrative and finance
costs be 3% for the average customer, they’re more like 9%. Now you stand
not to make 4% but actually lose 2%!
Most dealers I know get wise after someone has strung them out and then
try to fix this after that fact. Sometimes it works, sometimes it doesn’t. It’s
just a lot harder to do. If you factor in what this whale is going to cost you
including the higher cost of credit, make sure you price it accordingly.
Celebrate the win and sleep well knowing your large new customer will also
be a profitable one.
www.bluetarp.com
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