To float or not to float

At my shop and others I've been in contact with, cash flow and timely payment have become issues that require greater scrutiny. If that's the case at your shop, dealing with them effectively will be a test of your management skills.

March 15, 2012By Keith Jennings

Open Flipbook

I have several friends in the commercial landscaping business. They consistently tell me how their customers never pay on time, sometimes stringing them out for months. This doesn’t make sense to me, so I asked why they tolerate it. They replied, “That’s just how some customers are.”

At my shop and others I’ve been in contact with, cash flow and timely payment have become issues that require greater scrutiny. If that’s the case at your shop, dealing with them effectively will be a test of your management skills.

There’s no question that machine shops shouldn’t be expected to finance customers’ operations. But eventually, this is a hand you’ll be dealt, fair or not. It’s a matter of your risk tolerance and whether you’ve got the financial wherewithal to handle it.

Most well-run shops can deal with slow cash flow to some degree, but it comes down to a couple of choices: build a cash reserve and use those funds to pay your suppliers on time and float a customer until they pay in 45 to 90 days, or reduce your customer list to only those who’ll pay on time.

Building a “float fund” is one mechanism to pay suppliers on time regardless of whether your customer pays or not. I’ve met a few shop owners who serve industries that typically pay in 60 to 90 days, and it’s just a part of doing business with customers in those industries.

On the other hand, some shops are very cash-flow dependent and can’t afford to float well-funded companies. Waiting 60-plus days for payment is distracting and creates financial stress. Slow-paying accounts force shops like ours to be selective about customers and the payment terms offered. There’s something to be said for focusing solely on accounts that match a shop’s capabilities and pay on time. Who wouldn’t like that scenario?

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Many shops, including mine, fall somewhere in the middle. In our case, slower cash flow has required us to carefully analyze numerous accounts. We’ve developed a customer rating worksheet and measure their true value, with payment being one criterion. We discovered that a few accounts we thought were profitable were not. Their average orders weren’t large, they usually needed a rush turnaround, and they didn’t pay on time—not a favorable combination.

This analysis is valuable when reviewing first-time projects, when the learning curve is longer. The reason a shop accepts a difficult job is the customer’s potential for future business. If a customer wanted your shop to run a stressful job and you knew they were slow payers and little business would follow, you’d probably decline.

Job shops aren’t banks and shouldn’t be expected to act like them. The products we make require an up-front investment in labor, materials and more. Our suppliers expect to be paid on time and doing so improves our credit rating and provides more opportunity for growth.

If a customer requests credit—especially for small amounts—or has a reputation of slow payment, maybe you should pass and let the competition finance their operation. We’re not in business to provide outstanding machining services for free. It’s also a test of your leadership to ascertain their potential and not be afraid to say no.

Key accounts may demand small jobs before you can get the big ones and the headaches of those jobs come with the package. However, many projects aren’t worth doing. Review your accounts’ histories and long-term potential so you’re not strung along with jobs that don’t meet your standards.