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Lose customers from hell

ARE customers from hell really worth the effort?

Many businesses, particularly small ones, continue to deal with customers who are difficult and unprofitable to the seller, purely because they think any sale is a good sale.

While business operators may have a gut feeling that a particular customer is more trouble than they are worth, they seldom tell the customer that they are not going to sell them their product or service.

Businesses are often too willing to accept sole responsibility for the business relationship.

If there is a problem, the business owner tends to assume it is their fault and their responsibility to fix.

However, it may well be that the customer is making unreasonable demands.

Big business customers can present a particular problem.

They tend to ask small suppliers for extra services or small runs of particular customisations that often lead to increased business expenses.

The smaller operator will usually absorb these expenses to keep what is seen as a valuable customer – whether or not they are actually profitable to the vendor.

In fact some big businesses who can afford it still do not pay their bills on time.

According to insolvency experts, small businesses can be waiting up to two months for payment.

The longer cash is not spent on bills, the longer it is earning interest.

The identification of unprofitable or underperforming trading relationships with customers is one of the greatest challenges facing business.

Customer Profitability Analysis, developed by the ASCPA Manage-ment Accounting Centre of Excellence, highlights the need for management accounting systems to shift from a traditional product cost emphasis to a stronger focus on the measurement of profitability of individual customers, markets and distribution channels.

Only when armed with this information can management make effective decisions that make the best use of their resources.

Customer profitability analysis does not have to be a prohibitively expensive or difficult exercise.

Common sense and a good costing system are usually sufficient to determine the profitability of customers.

The ultimate goal is a 100 per cent rate of profitable sales.

Details of the Customer Profitability Analysis are available from the CPA Internet site at www.cpaonline.com.au. Go to publications and look for management accounting issues.

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