Latest / Scaling Up with Fexingo: How Small Businesses Become Mid-Market Companies / How a Building Materials Firm Scaled Past 30 Million by Fixing Its Credit Policy
Transcript
- Lucas: So there's a building materials supplier in the Pacific Northwest, family-owned, doing about thirty million in revenue, and they hit a wall. Sales were flat for two years, and the owner kept blaming the market. But the real problem was sitting in their accounts receivable aging report. Luna: Ah, the classic hidden growth killer. So what was actually happening? Lucas: Well, they sold to general contractors and subcontractors on net sixty terms, which is pretty standard in that industry. But in practice, a lot of those contractors were paying at ninety or even a hundred and twenty days. And the supplier was scared to push back because they thought they'd lose the account. Luna: So they were essentially financing their customers' operations with zero interest. That's a huge drag on cash flow. Lucas: Exactly. The owner told us, 'If I demand payment on time, they'll just go to the next supplier.' And that's a common fear. But when we looked at the numbers, they had about eight million dollars tied up in receivables. That's a quarter of their revenue just sitting there, and it was costing them maybe four hundred thousand a year in financing costs and opportunity costs. Luna: Ouch. So what did they do? They didn't just start calling people and demanding checks, right? Lucas: No, that would have been a disaster. They actually rebuilt their whole credit policy from scratch. And the key insight was distinguishing between a credit policy and a collections policy. A credit policy is about who you extend credit to and on what terms. A collections policy is what you do when they don't pay. They had only the latter, and it was reactive. Luna: So what did the new credit policy look like? Give me the specifics. Lucas: First, they segmented their customers. They ran credit checks on every new customer, and they also reviewed their existing top hundred accounts. They scored them based on payment history, industry risk, and how long they'd been in business. Then they assigned each customer to a tier. Tier one got net sixty, tier two got net thirty, and tier three had to pay on delivery or even COD. Luna: That must have ruffled some feathers. How did the contractors react? Lucas: Some grumbled, sure. But here's the thing: they didn't lose a single top-tier customer. The tier one guys, the ones who paid on time anyway, they didn't care. The tier three guys, the chronic late payers, they either shaped up or left. And the owner realized that the ones who left were the ones he was losing money on anyway. Luna: So it was almost like a self-selecting filter. That's smart. Lucas: Yeah, and they also introduced an early-payment discount. Instead of net sixty, they offered two percent off if customers paid within ten days. That gave the good customers a reason to pay even faster, and it gave the supplier cash earlier. Luna: Two percent for twenty days early? That's an annualized return of something like thirty-six percent. That's a pretty sweet deal for the supplier if it works. Lucas: Right, and it did work. Take-up was around forty percent, and the ones who took it were exactly the ones they wanted. Their days sales outstanding dropped from sixty-five days to forty-one days within a year. That freed up about three million in cash. Luna: Wow. And that's cash they could reinvest in the business instead of just eating the cost of waiting. Lucas: That's the whole point. They used it to buy new inventory at better prices, and they even hired a sales rep. But the real lesson is that financing your customers is a business decision, not a default. And a lot of small businesses just default to whatever the industry standard is without thinking about whether it's actually good for them. Luna: Yeah, and this is a topic that hits home for us too, in a way. We make a podcast that's free for anyone to listen to, and we keep it that way by not running ads. Instead, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Lucas: Yeah, it's a similar principle, actually. We choose to be listener-funded rather than ad-funded, and that keeps us accountable to the audience, not to sponsors. Luna: Exactly. And if these conversations have moved your work forward in some small way, you can be part of that. But no pressure, ever. Lucas: Alright, back to the building materials crew. So they fixed the credit policy, but that was just the first step. The next thing they did was redesign their invoicing and follow-up process. Luna: Because even with a good policy, if your invoicing is sloppy, you're going to have problems. Lucas: Exactly. They moved to electronic invoicing with clear payment terms on every invoice, and they set up automatic reminders. The day after a payment was due, the system sent a polite email. After fifteen days, it sent another one. At thirty days, it escalated to a phone call from a dedicated collections person. Luna: And they made that calls scripted, I bet. So it wasn't like 'hey, where's my money?' but more like 'hey, we noticed this invoice is thirty days past due, can we work out a plan?' Lucas: Right. The whole tone was 'we value the relationship, but we also need to get paid.' And they offered payment plans for genuinely struggling customers, but they made it clear that was the exception, not the rule. Luna: So what was the actual revenue impact? Did sales pick back up? Lucas: Within eighteen months, they were back to growth. Revenue climbed to about thirty-five million, and they set a new record for operating margin. The owner said the biggest shift was psychological: he stopped feeling like a victim and started feeling like he was in control of his own cash flow. Luna: That's a great takeaway. You don't have to accept slow-paying customers as just part of doing business. You can actually do something about it. Lucas: And the thing is, this applies to so many B2B businesses, not just building materials. If you have a CEO who says 'we can't push back on payment terms,' that's a red flag. You're not a bank. You're a supplier. Luna: So what's the first step for a small business owner listening who wants to fix their own credit policy? Where do they even start? Lucas: I'd say pull your accounts receivable aging report and look at your top ten customers. How many of them are paying late? And how much do you have tied up? Then run a simple calculation: if you could cut your days sales outstanding by twenty days, how much cash would that free up? That number can be a wake-up call. Luna: And don't be afraid to segment your customers. Some are worth fighting for, and some you should let go. Lucas: Exactly. It's not about being a jerk. It's about being fair to the customers who pay you on time and not subsidizing the ones who don't. Thanks for listening, everyone. We'll catch you next time.