Don’t think for a moment that your banker won’t turn down your loan request if you’re generating poor profit margins. Why should a bank give you a loan if you’re not going to use the money to produce strong cash flow?
According to Earl Williams, a chief financial officer for a nationwide provider of information management solutions, not every customer is one worth having. Williams recounts that soon after being hired he gave a list of the five lowest margin customers to the company president and recommended to either “fix them or fire them”. These customers produced low margins because either pricing was too low or they weren’t paying in a timely manner. The president took his advice and fixed some and fired others. The company’s profit margins and cash flow doubled the following year.
I’ve spoken to a few companies that go through this exercise on an annual basis and fire low margin customers. Not a bad idea. Why wait until your company needs financing and the bank says “no”?
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Related Tags: factoring, accounts receivable, small business, bank loan, working capital, cash flow, profit margin, business loan, chief financial officer, financing
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