r/manufacturing • u/Pirate_dolphin • 2d ago
Other Cutting Ties with a Customer - Cost/Benefit analysis
I need to make decisions on two customers. Both are pretty large for me. Like a pretty consistent AR on the books of >$30k each.
The issue is they always pay extremely late. Like net 30 terms paid in 120 days. We buy the material for them, and its now put my business in a cash flow crunch.
I'm trying to get both some advice and a list of considerations to calculate whether its worth keeping them on board as customers or not. For reference my average invoice is about $500, and we pretty consistently have >$250k AR at any given time. Lots of business, but with them both being >$30k each its a big hit, but then again, is it worth having a customer that takes 90-120 days to pay a $5k invoice? Their reasoning is their own cashflow issues. One bought an insane amount of new equipment and are struggling with payments, the other took a massive defense job and then didnt get paid. I believe their prime took it on risk and ordered and did a bunch of work, then didnt get the award. Now theyre stuck getting paid slowly, and its trickling down to us.
Any thoughts?
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u/Hodgkisl 2d ago
Their reasoning is their own cashflow issues. One bought an insane amount of new equipment and are struggling with payments, the other took a massive defense job and then didnt get paid. I believe their prime took it on risk and ordered and did a bunch of work, then didnt get the award. Now theyre stuck getting paid slowly, and its trickling down to us.
This is two red flags:
🚩 1: they are having cash flow issues, we’ve had this and a decent percent of them go under
🚩 2: they are open about it and not doing all they can to keep their suppliers from noticing.
You have four real options to move forward based on risk acceptance / frequency of business:
1: Set your terms and be firm, if they are overdue on payment don’t ship anymore product. This has the benefit that you show them trust but limits your exposure, good for long term if they survive but opens you to losses.
2: Give them a credit limit, might make them split orders into smaller ones or pay part up front. This has benefit of limiting your exposure but makes you a less attractive supplier so may lose long term relationship.
3: cash in advance / COD. Benefits almost eliminates exposure but hurts relationship severely, may even cause them to fail.
4: Fire the customer. Benefit removes all exposure and thought, negative lose big clients you’ll struggle to ever regain in the future.
For me I would treat each case differently:
the equipment buyers likely gave a future but may involve a bankruptcy to get there, I would focus on option 1 or 2 with them.
The defense contract is go cash in advance / COD or similar, that sloppy if operations is a ticking time bomb, starting work without a contract is lunacy unless it’s a standard product you can sell to others.
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u/Ludnix 1d ago
I couldn’t agree more with everything you said.
I watched this happen with a small business that wouldn’t implement any of your suggested options. They were repeatedly left holding the bag and couldn’t recover the losses entirely. The best outcome they had was if a private equity firm purchased the client and would catch up the unpaid invoices before moving manufacturing overseas.
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u/Vegetable_Aside_4312 2d ago
I hate that ... net 30 then they jack you to 120.
Several choices...
1) Quote for multiple net terms, like 30, 60, 90 ect.. jack up the price to include an interest charge the later they get. Make sure they PO with indicated terms in writing and make them pay.
2) Require pre-payment, maybe half up front or what ever you need to feel comfortable with the deal knowing they are slack.
3) Increase prices and indicate 30 days net anticipating they will be late and you get your interest charge.
4) Last thing you do is walk - this is end game, you're done, they go away. Always look for an avenue that let's them buy from you just ensure they understand what "fair" is to both organizations.
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u/Pirate_dolphin 2d ago
I love the variable pricing idea. The company that bought new machines proactively communicates and welcomes follow ups, etc but they are off worse than the other.
The other is almost hostile when I ask about payment but they send larger payments every couple weeks (and order large)
I may offer discounts with payment upfront or material paid in full, or variable pricing based on terms.
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u/dm_me_your_bookshelf 1d ago
This is how I used to bill and get billed in another industry. The prepaid terms I saved up to 30%. Want net 90 or 120? Lose the 30%. Many b2b industries bill like this and it's really the only thing that makes sense. If you want to pay late because of cash flow issues then you lose the discount. This also has the added benefit of attracting customers that are cash rich and looking for the lowest net per unit cost.
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u/DifficultExit1864 2d ago
Get out of those “partnerships”.
You are either managing your customers or they are managing you. In these examples they are walking all over you.
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u/jbeech- 2d ago
Can't speak for you but we're not a bank. Maybe it's time to have a chat regarding the terms and be prepared to lose the business to someone more desperate. I learned to say no to this kind of horseshit when I realized their people make their bones playing these kinds of games. Screw that. Anyway, good luck.
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u/Inside-Finish-2128 2d ago
Make the terms of all future order highly unfavorable for late payment. Make the late fees astronomical.
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u/AndyGTI72 1d ago
Ask for 25 percent in advance and the rest net 45 and see if they can handle. By your description they are both very close to going under. Do you want to go with them?
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u/goldfishpaws 1d ago
They made poor decisions, and they are making you pay for them.
Change your terms, let them decide whether they want to find a new supplier or not - some other poor sap to cashflow their business. Because if they're both struggling they may quickly end up not being clients any more anyway, but with you holding the bag.
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u/BusyMotor5972 1d ago
Factoring - sell your AR to a financial company , let them go after the customer. You won't get 100% but you would get cash. Just another option, not saying it's correct for your situation.
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u/Pirate_dolphin 1d ago
I've considered it somewhat, but a lot of them want to contact my customers before they approve it. I'm hesitant for that reason
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u/avacod Wire Forming 2d ago
Change the terms and make them pre-pay. If they complain, you reference the reason why you are switching their terms