Up-front payment is required

Happy New Year! I hope that 2013 was a profitable year for your shop and that 2014 starts out on a positive note as well.

As I reflect on the ups and downs of the previous 12 months, the “classroom of reality” continues to educate me and my team. As a result, we created a list of goals for 2014. The first item on our list, and the one I’ll discuss here, is the objective of tightening our shop’s credit policy by doing something really crazy—working only with customers that pay invoices in a timely fashion. This is because slow-payers cause us to spend an inordinate amount of time and energy attempting to collect money for work we performed on time and to specification. Really, why the need to hound them? Frequent excuses include: “We didn’t get the invoice, so please resend it;” “Our bookkeeper has been sick;” and “It’s not in my system.” These and other delay tactics are tiring and distracting to deal with month after month.

When analyzing our 2013 sales, I noticed about 40 of our 200 customers had constant payment issues. About half of the 40-customer group were existing accounts we have attempted to work with and have chosen to tolerate, while the others were new accounts that we quoted and accepted work from in an effort to grow and diversify.

To ensure new accounts are profitable, we carefully review their requirements before saying yes. We’ve improved our screening process over the years and decline a sizable number of inquiries, but we still accept new customers if the jobs are within our capabilities and we believe the customers have future potential, or if they’re willing to pay upon completion.

Usually, the first order with a new customer is a fire drill, likely involving erroneous part drawings and a promise that getting them out of this bind will result in more business. Too frequently, the new work takes a long time to quote, disrupts the normal schedule and consumes valuable engineering, production and QC time, only to end up causing a hassle with the customer about paying their invoice later.

Under our new policy, prospective customers that are in a major bind and require urgent delivery get a different response: We’ll take the job but will not accept any open payment terms. Unless a new customer is prepared to pay immediately via credit card or check, we no longer jeopardize our regular workload with rush jobs from such a customer. These kinds of jobs tend to create stress and tension amongst the staff as they try to work in new business. If we’re going to jump through hoops, our payment expectations must be met or the job won’t run.

This doesn’t mean we’re so swamped that we don’t want new business. I’ve regularly written about the importance of growing our company and intend to follow a controlled-growth path. However, unless payment is made up front, we’ll focus instead on jobs from the top accounts that pay their invoices on time. Of course, if that new customer turns into a good one by providing us with steady business, we’ll be glad to change the payment terms, but until then it’s “cash on the barrel.”

I’m looking forward to another interesting year in the machining world. Contact me with your thoughts and ideas; I enjoy hearing them. CTE

About the Author: Keith Jennings is president of Crow Corp., Tomball, Texas, a family-owned company focusing on machining, metal fabrication and metal stamping. Contact him at kjennings@jwr.com.