Knowing when, and how, to cut your lossesKnowing when, and how, to cut your losses

Severing ties with customers who pose consistent payment problems is a painful but sometimes necessary decision. Avoiding such customers in the first place is even better business.

You''re fired!" That''s what many processors and moldmakers would like to tell customers who have a hard time making payments. The urge is all the more pronounced considering rising materials costs and growing competition from low-cost suppliers. When customers are late or negligent paying their bills, cash flow is constricted and relationships become strained.

"The beauty of firing your customer is there is nothing illegal about it," declares Bill Tobin, president of WJT Assoc. (Louisville, CO), a plastics consulting firm. Tobin has been involved in legal cases since 1975 in all jurisdictions. "It is not a business interruption, and it is a hell of a club to hit somebody over the head with."

Processors and toolmakers can ill afford to carry customers on their backs by fronting materials and labor costs during precarious times. These companies are already having enough trouble making ends meet.

"In the good old days, there was enough profit to cover slow or no-pay customers," recalls Scott Harris, past president, American Mold Builders Assn. (Roselle, IL), and president of Harris Precision Mold (Tempe, AZ). "Now the margins are so small that even the interest costs of carrying a mold for two to three months may wipe out any profit made. Stronger, better, smarter companies will fire their bad customers and have the capital to survive."

How much longer you afford to do business with customers who can''t afford to pay their bills reasonably promptly? Are you simply better off severing ties with the late-payers weighing down your bottom line?

"Too many molders are afraid of getting rid of bad customers," Tobin says. "The fear comes down to the fact that even though the customer is late making payments, losing them would create a hole in capacity."

Slow train coming

Accounts receivables (A/R) are currently running 90 to 120 days for processors, according to industry estimates. Moldmakers'' customers are taking even longer to pay their bills—about six months on average.

The most common excuses voiced by customers are akin to a child saying the dog ate his homework—troubled firms often cite quality issues and lost paperwork. Public companies may have an additional incentive to delay payments: enhancing their cash positions for quarterly financials.

"Troubled customers are closely watched or rejected by processors and sometimes placed on COD [cash on delivery]," says Jeff Mengel, a partner in charge of the plastics industry team at Plante & Moran (Southfield, MI), a CPA and consulting firm. "As a result, troubled customers sometimes look for troubled processors that are hungry enough not to object to inconsistent payment terms."

Before the last resort

Rather than fire customers, moldmakers have been more commonly known to threaten production delays if old receivables go unpaid. They believe this gives them leverage, especially over customers who serve production-dependent industries such as automotive, where meeting delivery times is critical. "It is sort of like giving up the last hostage in a bank holdup," says D. Craig Wiggins, president of Tooling & Equipment Capital Solutions Inc., a boutique tooling financing company with offices in the U.S. and Canada. "Once you let the last hostage go you have lost all bargaining power."

However, some caution against taking such a drastic step, as it could very easily be perceived by the legal system as a business interruption.

"A lot of people think if they withhold a product or service, they can motivate the customer to pay," Tobin says. "There are huge penalties for doing that. Your customer can take you in front of a judge and by doing that, you lose the tool and your leverage."

Leverage can be further compromised, depending on the market served. For example, in automotive, it is common to be paid after production parts are approved by carmakers. But this process, called PPAP, can take several months or even years. "While some banks may support tooling A/R over 90 days, it typically is limited, and virtually none support work in process," Mengel says. "Toolmakers serving the automotive industry must have a healthy balance sheet to support this cost."

Molders and tool shops can work with lenders, and sometimes customers, to ensure adequate financing is available for late payments. But Wiggins notes that additional financing is not always available, considering tighter lending criteria at banks due to bad economic conditions and the precarious state of certain industries. "They are reluctant to extend more credit unless both the borrower and the borrower''s customers are healthy," Wiggins says.

Options vary by location

Canadian banks are more willing to open their vaults. Moldmakers can access non-payment insurance on their contracts, Wiggins says, which extends the eligible days a bank will lend against the A/R to one year or more, vs. the 90 days typically offered by U.S. lenders. Such insurance is sold by Export Development Corp. (EDC; Ottawa, ON), which is a government-owned financial provider.

"Canadian banks look to lend a greater percentage of money for more days than U.S.-based banks because of this added security," Wiggins says. "But even EDC has its limits in that it will not insure risky buyers, or will limit their exposure to risky buyers."

As a last resort, molders and moldmakers can consider legal measures, such as filing a civil lawsuit and attaching liens on customer''s assets. "Michigan has the best lien law, by far, and has a provision for the moldmaker to attach a lien without having possession of the mold," Harris says.

Both solutions, however, are radical steps that could ruin whatever customer relationships processors have left. Not only that, but litigation fees are excessive and court cases can drag on for months. "These are viewed as a scorched-earth, or last-resort measure," Mengel says.

The manufacturing climate is such that molders and moldmakers should think long and hard before deciding whom to do business with. Experts advise performing background and credit checks to determine a company''s financial position. Payment and work completion milestones should be clearly spelled out on purchase orders.

"The best way to assure proper payment is to set up specific funding stages upon specific areas of completion, much like the construction industry," Harris says. "Have these funding stages clearly quoted and accepted as part of the purchase order."

Experts advise plastic members to walk away from projects that do not meet their criteria for doing business. "Strong companies get to choose their customers while weak companies often feel they have to accept whatever customer will do business with them," Mengel says. "With this as the premise, weak companies who can ill afford nonpayment are the ones most likely to suffer from nonpayment."

Contact information

Sometimes breaking up is hard to do

"Firing your customer" carries many connotations, none of which are positive. Does this imply processors should refuse future work? Does it mean writing off what''s owed? And should you continue conducting business with someone until they pay up?

The situation is akin to a couple experiencing marital difficulties and contemplating divorce. "You have to figure out if the pain and agony is better than going single with the chance to remarry," WJT''s Tobin says. In other words, processors may be better off cutting their losses when deteriorating relationships with customers go beyond repair.

Whichever way you slice it, the termination of a business relationship is often a permanent and irrevocable action. "Usually when you fire someone, you walk away and they don''t come back," Tobin says.

So how does one determine when the time is right to drop the axe? According to industry members, the first step involves putting together a short list of persistently late payors. "You can contact them to see if they would like to rectify the situation," Tobin says. "If they don''t, then fire ''em."

Along the way, you may be in touch with customers who cite various excuses—such as quality issues and pricing—to delay payments. These accounts should be cut off if adequate payment arrangements are not made and followed through, experts say. "Do you want to do business with someone you''re making 2% [profit] on who takes up hours of your time complaining every week?" Tobin asks. "That''s another reason for firing them."

Industry members are divided on whether processors and tool shops should complete the job, collect payment, and then cease doing business with late payors. Some believe you lose leverage delivering the goods without getting paid up front. Others cite potential legal issues, such as "business interruption," if such measures are taken.

"In most states, if you have possession of the mold, you are in a strong position to be paid," says Harris of Harris Precision Mold. "If you do not have possession, you are in a very vulnerable position."

For molders and tool shops leery about writing off bad debt, they could complete the job on a cash-on-delivery (COD) basis. "One type of COD is called a ''truck driver''s COD,'' which means the driver shows up at the plant with the product in his truck," Tobin says. "If he is not met at the gate with a check, he turns around and drives back."

In the nutshell, industry members concur it is simply not worth the time and effort to chase down delinquent accounts. Instead, processors should focus on obtaining more business than they can chew on to fill holes in capacity. "You can fill capacity with people who will work with you," Tobin says. "Then you can replace bad business with new business."

Greg Valero

Export, pay-as-you-process help boost payment morale

Some processors and equipment manufacturers in developing countries are finding unique ways to ensure they get paid. In Iran, Sirus Bakhtiari, general manager of injection molding machinery maker Poolad (Tehran), has come up with a deal to help cash-strapped domestic processors pay for equipment. In his community bank loans are notoriously difficult to get at reasonable interest rates, and local customers tend to delay paying debts because of cash flow problems. Bakhtiari is offering processors, who can scrape together 20% of the price as a down payment on equipment, a plan to pay in 24 installments over 12 months—essentially a pay-as-you-process deal. He says payback has been between 12 and 15 months.

Milanko Jovanovic, owner of thermoforming operation Divi (Uzice, Serbia-Montenegro), says payment morale among domestic customers "is a catastrophe."

He acts as his domestic customers'' bank in many cases, he says, since Divi has to pay in advance for resin, while his customers chronically delay payments.

His newest solution to the problem is to concentrate on export markets. "Experience shows that Western European dairy customers pay their bills more punctually than many local ones," Jovanovic says.

Milorad Skpijunovic, director of blown film processor BelPlast (Bela Zemlja, Serbia-Montenegro), agrees, and says in some cases that local customers pay only after 100 days. "It''s terrible. Exporting shopping bags and other films is our assurance that we''ll be paid in a reasonable amount of time," he says.

In Turkey, Bahri Kurtoglu, managing director of injection molder Kurtoglu Plastik (Manisa), says domestic customers are buffeted by a 20%/yr inflation rate. Payment morale has sunk substantially, he says, and to get around the problem he and other processors, like their counterparts in Serbia-Montenegro, are targeting exports as a way to guarantee more timely payments.

Robert Colvin