Several of my customers tell me they hate dealing with one or more of their customers but are glad they still have their sales volume to keep everything going during this downturn. I suspect you or some of your managers feel the same way.
I can't help but laugh every time I hear this and am always proud when business holds all customers in high regard. I have always taught my clients that customers are the reason they are in business and all employees must be trained in the highest level of customer service and quality. The customer will always be King in a capitalistic economy.
With that said, you must make sure your business is profitable to continue to serve your customers. We have all seen what we thought were great businesses that just disappeared. Even the most customer oriented business has to make a profit. More often than not, small business works so hard in controlling their sales volume that they take their eye off the bottom line. This is especially true during economic downturns. Have you worked hard to keep your current customers happy and on board by reducing prices during this current downturn? Let's review what your philosophy should be toward your sales volume.
Using your annual operating budget, you must define what your "survival level" is. What employees and fixed costs does your business require to stay alive? Defining your core employees and fixed costs is always a challenge but one that you should undertake every year. I always encourage my clients to look at three versions of their annual operating budgets - the worst case, the best case and the expected case. The scenario I am speaking of here is the "Worst Case." In our current economic times, the worst case can also be termed the "survival level." Many business managers gloss over the worst case scenario because they truly believe their expected case scenario is correct and they should manage the business based on those expectations. This downturn has many of my clients taking a much stronger look at their worst case and truly defining their "survival level."
After defining your "survival level" costs, it is much easier to determine what your sales volume must be. Your gross margin expectations on those sales will also be a factor in your Total Revenue calculation. If you are in a situation where you have to trim your sales prices for your customers, it will take added volume to cover your survival costs. Once you have determined your cash breakeven level, you have also determined your "worst case" scenario. I define the "cash break even" level as an annual net loss equal to zero when your non-cash expenses - depreciation, amortization, goodwill, etc. - are added back to your annual financial statement net loss. As an example, the annual net loss of $120,000 is at the cash breakeven level for your business when you have $120,000 of depreciation and amortization. In 2008 and 2009, many small businesses would consider this loss as their worst case scenario.
Always using your mission statement as a guide, a small business can now start laying out their customer requirements. Don't forget, however, that new customers and new product offerings must be listed in your customer requirements. While forecasting customer requirements in an economic downturn is never an easy situation, this exercise will result in a clear vision of which customers and what volume levels are required for your three operating budget scenarios. Many clients also discover this as a great base line for sales personnel incentive compensation plans. Like every small business owner, I love combining tasks and making life easy and simple.
The next step in this process starts with your spreadsheets for each customer. These spreadsheets list their products, annual volumes and pricing. Your accounting department should examine this information for the gross margin possible at the volumes and pricing levels expected. This gross margin information should be added to each customer spreadsheet to provide you and your sales department a very clear view of each customer and their importance to your business. If you have hundreds of customers, I would recommend performing this evaluation only on those customers who contribute 5% or more of your overall sales volume. Business normally works on the generic 80/20 rule. A select few of your customers will make up 80% of your total volume with the majority of your customers falling into the bottom 20%.
While your accounting department is finishing their customer review, it is now time to get all departments involved in this process. Each and every department must define any specific issues with each customer. Are there any employees that specifically handle one or more customers? Does a customer more frequently have return product or quality issues that require additional cost? Does the sales department spend an abnormal amount on travel or entertainment expense for a customer? Does a customer always pay late and take additional deductions? All these issues have a cost to your company that can be defined by your accounting department. I have seen a business think they were making a great profit on a particular customer until they discovered that they were employing three clerks to handle their specific paperwork, had to fly cross country monthly to buy them dinner and had to write off 5% of most shipments for quality issues that no other customer had.
Finally, you now have the true revenue for each customer on a simple to read spreadsheet. This entire process can take anywhere from a week to several months to put together depending on your size and number of customers. It is, however, a true eye opening event when you reduce each customer to an objective set of numbers. All the emotion and subjectivity is gone and you can now see a customer's impact on your business. Every client I have converted to this review process has kept it going on an annual basis as part of their operating budget process. The sales department initially pushes back on this exercise because they look primarily at the top line number on your financial statements. Converting their focus and incentive compensation plans to the "net" value of a customer will always improve your company's bottom line.
Firing customers is always a difficult concept for every business. Your business and every business in the world is established to find customers and build these relationships. Your mission statement probably even has a phrase or two describing how customer satisfaction is a high priority. It is inherently wrong to fire customers.
This is a very difficult concept for most business managers but it does separate the winners from the losers in the free enterprise system. I just finished working with one business owner who would not even consider asking for a 10% price increase even though he was barely breaking even. This customer's new packaging and shipping requirements had increased his costs significantly. My client said that this customer was having a tough time and he couldn't cause this company any problems. While I strongly believe that quality, integrity and credibility must be the foundation of every business, sympathy is the cornerstone of a closed business. My ex client understands that his 60 employees and his business are at risk but he has made the choice to put his company in this position.
Are you willing to place your company in this position?
If you have a sincere desire to protect your company's future and the future of your employees, you must look objectively at your customers and allow your company to control which customers you want to deal with. This is your company and you are obligated to control its direction. Be aware that my use of the phrase "firing some customers" should be accomplished in a very customer friendly fashion. Never terminate a customer as you would an employee. Raise prices, drop specific packaging, change your distribution model or find a way for this customer to choose not to do business with you. Never burn any bridges because this customer may become a great prospect again in the future.
I once saw a client terminate his sales manager after a long time customer accepted a 25% price increase. This customer amazingly told the owner that he was surprised they hadn't asked for an increase earlier because they were much cheaper than his competitors. This client went from a small business making about 2% on Sales to a medium business making 5% on Sales with just this analysis. This client lost 10% of its customers that year and now completes this customer analysis every year in their annual budgeting process.
You and your staff work hard every day and probably spend well more than a forty hour week running your business. You probably don't need any more practice so make sure you are making a profit in everything you do. It is your responsibility to ensure the long term health of your business for your employees and your own family.
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