At some point every company should reflect on their customer portfolio and ask, are we selling to the right customers? What is the actual profit by the customer when deduction-related overhead costs, extended terms demands, and risks are considered in the net profit calculation?
As a credit manager, you should be concerned about concentration. This could involve a large percentage of your AR portfolio concentrated in just a few accounts. Even if they are creditworthy, losing a large customer or changes in their payment practices can severely impact your company's cash flow. There are other concentrations to be concerned about as well. For example, low-volume customers you ship to and manage directly. They may bring a higher risk of timely payment and a lower profit margin when all costs are considered.
If you have not done so already, suggest this type of review to your management team. Suggest the appropriate stakeholders in Sales, Marketing, Finance, Operations, and potentially others, and team up to look at the true value your company is gaining from each segment of your customer portfolio. In some cases, it might be better to redirect an entire segment to distribution status. Yes, it may seem, to take a bite from the margin, but incorporate the cost savings and reduction in collectability risk into the calculation.
There may be offsetting market strategies to justify the current portfolio. In some cases, lower-profit customers may be of strategic importance just to absorb overhead costs. The higher profit comes from others. It is certainly worth a look.
Think of this as a three-step process:
- As a first step analyze the profitability by customer.
- Then determine the strategic value of keeping the low-profit, high-maintenance customers.
- Lastly, examine the alternatives.
By initiating this effort, you will bring value to your company. Any changes made are likely to free up limited resources to manage the most profitable relationships. A strategic-minded review of your company's customer portfolio is likely to improve profitability, cash flow, and AR portfolio risk.
Source: Review Your Customer Portfolio From the Lens of Risk, Reward, and Profit
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