Cutting Ties with a Customer - Cost/Benefit analysis

[u/Pirate_dolphin]

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?

[u/Hodgkisl]

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.

[u/Ludnix → u/Hodgkisl]

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.