Feature:
Just Say No to Bad Customers

One of my clients is a very conservatively run manufacturing business. We'll call them Company A. Company A actually has more cash in the bank, than loans that they owe to the bank. During the first quarter, Company A experienced a huge increase in the number of price quotes requested from new customers. Several highly leveraged competitors could not adequately serve their customers, which led to potential increased business for Company A.

Company A is in the plastics industry and all of the raw material it purchases is based on commodity pricing that fluctuates based on the cost of oil. All of the competitors buy raw material in this same market. So product cost is generally the same across the industry.

Company A understands their product costs very well, and uses a diligent pricing methodology to quote new business. Several of the initial price quotes given to new customers were immediately rejected as too high. In a strong economy, that is usually the end of the story and the potential customer goes elsewhere. However , several of the potential new customers have returned to request additional price quotes. One very large customer has returned four times since March!

So what's going on here? Several of Company A's competitors have either gone out of business or are teetering on the edge. Under these circumstances, many companies would have welcomed all of this new business at any cost. Companies that did not have disciplined management and / or did not understand their costs would have accepted all of the new business, only to slowly go out of business. For these companies sales would be up, and profits would be down!

How about Company A? Sales for the year are down about 30%, but profits are only down 15%, due to diligent cost control and the avoidance of discretionary expenses. Company A continues to negotiate with these potential new customers, adjusting product specifications to keep customers happy, while still maintaining an adequate selling price. When the economy picks back up, Company A's business will be great, because several competitors have fallen by the wayside.

The moral of the story - don't just take new business to get sales up. If that new business doesn't cover your costs, you are slowly going out of business.

Tim McClellan is a partner with B2B CFO, a national company of CFOs providing part-time leadership at the senior executive level. McClellan has more than 28 years experience as a CFO and Controllership for companies ranging in size from $10 million to large Fortune 500 companies. For more information, you can reach McClellan at tmclellan@b2bcfo.com or 404-915-5539.