How to survive losing a customer
Whilst a number of advisory practices have been quick to jump on the bandwagon of the recent Carillion disaster and its potential knock-on effects in the supply chain by advertising their services, this article will try and provide some useful pointers on the wider reaching implications businesses face when they lose a key customer and some practical tips on how to deal with it.
Most businesses at some point in their lifecycle will face the daunting prospect of losing a key customer whether through a sudden insolvency like that of Carillion or by other means such as competitor poaching or simple rotation.
This can be quite sudden and in a number of cases be for reasons out of your control or in others perhaps a warning sign of a wider malaise in your organisation. This will be touched on later.
Whilst daunting, if you know that you are going to lose a large customer for reasons other than their insolvency then you have time to plan how to adapt. This is not the case however, when a customer owing you money suddenly goes bust
So what can you do? First of all you must breathe. Nothing comes good from blind panic.
Secondly, assess and find out what has happened. If a customer has entered into insolvency proceedings find out who is dealing with it and what they are planning to do. If they are going to trade the business ascertain whether your services/supplies are key for this strategy. If they are, you have potential bargaining power which whilst it may not mean you get back the money you are owed may yield some profitable short term business Trading with Administrators, despite what many think, is a strong covenant for ongoing business as they must on a general principal of law pay for what they use and provide you with an undertaking. They are a payable expense as part of the Administration in priority to the Administrator’s fees. Make sure the terms of any future supply is well documented on your terms and signed off by the Administrator before any further supply is given.
If this is not an option, check whether you have any of your products with the customer and take steps to immediately identify them and arrange for their collection with the Insolvency Practitioner’s office. This is key in particular where the Insolvency Practitioner is contemplating a quick sale of the business. You do not want your unpaid stock being sold to a third party. To enable this you must claim retention of title over your stock and the strength of your claim will depend upon whether your dealings with the customer incorporate these terms.
Finally, and whilst not immediately pressing submit your claim to the appointed Insolvency Practitioner. Whilst it is a common misconception that distributions are rare from a insolvency process, it does happen. Filling in a claim form takes minutes and can be seriously worthwhile. I had a recent case where a significant creditor hadn’t submitted a claim and when questioned, stated they couldn’t bothered. When I told them that if they did they would get a cheque in the post for circa £40,000 it soon convinced them otherwise. Be warned however, that even on successful restructurings the timing of any dividend is likely to be protracted and you should not rely on this for your immediate or mid-term cash flow requirements.
Remember, the faster you react the more likely you will be able to be in control of the situation and lessen the impact on your business.
Turning away from the practicalities of dealing with the insolvent customer, a business must now immediately turn to the short term cash flow effects of losing the customer and the immediate bad debt.
Some quick wins
If you are VAT registered fill in a bad VAT debt relief form. Whilst this won’t generate funds it will ease your cash flow pressure when the next Vat payment is due.
If you have credit insurance, notify your insurer immediately and ascertain what you need to do to submit a claim. Ensure you have copies of all documents relating to the debt including any contracts or terms of supply.
Review your working capital and cash flow forecasts. If you don’t do them, now is the time to start. It’s important to quickly determine whether you can survive the impact on current reserves and working capital, or whether your business is likely to run out of cash in the near future causing pressure on your supply lines and putting your own business at risk of insolvency. Identifying when a cash flow problem is likely to occur is the first step to evaluating your business so that you can put in place plans to remain a going concern.
Remember cash flow is a problem that all businesses will encounter and can be managed with careful planning as long as you are confident that the business can remain or become profitable in the long term.
It goes without saying therefore that before any further action is taken with your business you must determine, bad debt aside, that you can return to profit with the loss of the customer and any associated future sales with them.
This is not an easy exercise but you must review your profit and loss forecasts and ascertain whether the income from your other customers is sufficient to cover the fixed costs of your business and generate a profit for you. If you need help with this, discuss with your accountant or contact a restructuring advisor who has expertise in forecasting.
There is no point in addressing a cash flow shortage if you cannot demonstrate profitability. Additional cash flow can be provided by a number of sources, which I will touch on but should only be used for either steadying the ship or used to alleviate the fixed costs in your business.
If you cannot demonstrate profitability on your current fixed cost base, then you must review what fixed costs can be eliminated from the business. Whilst this may in itself cost money as long as it can demonstrate long term viability you should seriously consider putting these into place sooner rather than later. Unnecessary delays, in particular as a result of emotional attachment, can make the difference to whether your business will survive or not. Typically these may mean initiating redundancies, cutting down on unnecessary expenses, taking a pay cut and possibly downsizing premises.
Once a plan has been drafted you will need to look at whether you need additional finance to action these and bridge any working capital gaps in your current cash flow.
Whilst it is understandable that businesses at this critical time will be reluctant to take on more debt through traditional means such as bank loans and increases in facility draw downs, there are other ways which may help alleviate short term cash flows, such as:
Time to pay arrangements with HMRC to help defer VAT and PAYE payments.
Discussions with key suppliers about extending payment terms.
Government loan assistance for necessary redundancy schemes.
Formal or informal Voluntary Arrangements.
It should be noted that following the collapse of Carillion, banks are offering support to businesses affected by the insolvency and it is always worth discussing with your bank/financiers ways in which they may be able to assist in any short term cash flows. This has grabbed the headlines recently and there are plans for all loans to be provided with government backed security, which hopefully means they will be widely accessible.
In all of the above, if you are unsure get help from a suitable restructuring professional; engaging their services does not mean your business will fail but will hopefully keep it viable.
Whilst we all know it's good business practice to not have all your eggs in one basket and not be over reliant on one customer, in reality for reasons of competition and others this is sometimes not always possible for many businesses.
You may be blameless for the insolvency of a customer, however not spotting the signs early enough or indeed losing a customer through other means does tend to point to a wider underlying problem.
This can often be as a result of taking your eye off the ball on your operations or simply overtrading and trying to concentrate too much on turnover.
Whilst difficult it is always important not to chase turnover but to concentrate on profitability. Review all of your customers at some stage during the year by checking credit ratings, industry news and check your own records to see if there are any changes in their payment patterns.
If you are concerned that payment time is creeping or they are increasing their credit with you then you should contact them for a meeting at the earliest possible stage.
Finally it is always important to understand that all businesses change and evolve and this is just a natural part of business. If you are over-reliant on one customer, even if it makes you extremely profitable, always consider how your own business can adapt and progress into new revenue generating opportunities to increase your customer portfolio.
A customer insolvency or loss is bad for your business and arguably is likely to happen at some point, however if you plan properly it should not be the end of the world. By being pro-active you will always be in control of your business rather than leaving its fate to others.