Credit Matters Blog

Defining a Good Customer

Kim Radok 28 January 2012


Defining who is a good customer, is always an issue of perspective.

The business owner/manager wants increasing sales and positive cashflow all the time.

Salespeople want sales and even more sales, if possible. After all, this is how the salespeople's role is defined and how they earn their wages. These objectives are also essential for the salesperson who wants to keep their job.

The Credit Manager wants customers to pay within terms so they look good in the eyes of management. Credit Managers are also employed to maintain cashflow, reduce the numbers of slow payers and bad debts.

Achieving these objectives is extremely difficult for the Credit Manager in the best of times. It is made even harder when management over-rules their stop supply decisions, fails to keep the Credit Manager up to date with sales and operational objectives and a lack of communication from salespeople about  "special sales" only the salesperson seems to know about.

The usual justification for increasing sales to slow payersor former bad debtors is always "Well it is in the overall best interests of the Business!". Yes, at times this is a valid argument. However, how do you prove it really is in the best interests of the business? 

Too many times in the past, my peers and myself have heard this comment and seen it as nothing more than a smoke screen to hide a senior manager's own self interests. Meanwhile, the other stakeholders in the business have to pay the price for these directions and try and clean up the resultant mess.

I suggest there are no hard and fast rules when dealing with customers. Times change, operating factors vary, and as we are currently experiencing, economic conditions are difficult.

Therefore, supplying a slow-payer with extended credit terms despite their poor payment record, may be a valid business strategy for the moment. For instance, other criteria may currently apply as you make the decision to supply these slow payers. The criteria may include suppliers offering a bonus for selling additional stock, the ability to take market share, to enter new markets, to get rid of surplus or obsolete stock quickly, etc.

So we have valid reasons for supplying a slow payer with additional stock and credit. The problem lies in the fact, many of these criteria are never communicated to the credit or accounts receivable department.

Without such communication, distrust builds within the various business departments or teams. Worse still, the business can appear to be poorly operated. As a result, it is not unusual to find customers playing one department off against another.

You may also find that customers are hassled for payment on invoices that are not due for payment, and the business's image is damaged in the marketplace. These outcomes are not good for any stakeholders in the business and generally will mean reduced sales in the long term.

If there is a policy of establishing a criteria on what is a good customer, many of the aforementioned issues will not occur. The criteria must also be flexible to adjust for special or new factors from time to time.

Finally, it is important to realise, your Credit or Accounts Receivable Manager maybe  just as ambitious as any other person in your business. An ambitious Credit or Accounts Receivable Manager will look at every opportunity to promote themselves and their business. This promotion is simply not possible if they are being obstructionist, have poor management reports or fail to grow the size of their Debtors Ledgers. 

There are many positive reasons why your business needs to have a definition of what is a "Good Customer". The correct definition will marry all the criteria which your  business needs to manage - risk, increasing sales, grabbing new sales opportunities and maintaining strong cashflow. 

If you manage to create the right "Good Customer" definition for your business, you simultaneously reduce the risk of trying to increase sales to slow-payers at the expense of maintaining strong customer cashflows and increasing bad debts.

May you be paid today rather than tomorrow.

Kim Radok