30 May 2016

Good customer service leads to failure


4 min

It's important to focus on all business aspects.

We were appointed to a reasonably large metal fabrication company that operated from two large factory sites. Our investigations revealed that the company was an example of both how to do business and how not to do business.

The company had only been incorporated a little over four years prior to our appointment. When it began, the director was the sole employee and he used a single mitre saw to cut metal to his customers' specifications. Fast forward to four years later, the company was turning over $42 million per year at, and up until, the date of our appointment.

The director was able to grow the company so quickly because he was extremely customer focused. He processed orders with speed and quality; whereas others in the industry had grown complacent. Plus he was well-liked by customers and staff. The company was reliable and the product was delivered without issues or complaints. As the business grew, the director gave a clear vision of this strong customer focus to his staff and to developing the systems and processes. The company's policy was to deliver goods within seven days of receiving the order, no matter the size. We found that orders were often processed within 2-3 business days. The director's strong business acumen resulted in much repeat business, a fantastic reputation in the industry and several referrals from its very happy customers. A perfect example demonstrating that if you provide a great service/product, you do not have to find customers, the customers will find you.

However, this strong customer focus appeared to extend too far.

Customers realised they could take advantage by not paying their debts on the due dates. The director forbade the accounts staff from chasing up customers. They were to refer all overdue accounts to him and he held closed-door telephone conversations with the customers, in a very soft manner (if he approached the topic at all!) and as they remained unpaid he continued to supply goods to them. We couldn't find clear credit analysis processes or procedures. Any business owner knows that cash-flow is king, and the company's lack of cash-flow was one main factor contributing to its insolvency. At our appointment, there was approximately $6 million in outstanding debtors with a large proportion over 90 days old. The debtors were financed and a Receiver was appointed to collect those debtors. They collected approximately 20 percent of the debtors within six weeks of their appointment. Clearly the funds were easily recoverable had they implemented standard and simple credit and collection procedures, but they were too focused on keeping customers happy.

The company's focus on growth also resulted in the company entering into a lease for a second premises fitted with large pieces of plant and equipment, so orders were processed within the 7-day timeframe and to hopefully expand into other areas of metal fabrication. This lease was for over $340,000 per year and at our appointment had been unused for six months. Despite being unused, the company employed a full-time onsite manager, and for some unknown reason, a permanent cleaner for the site. The first time we arrived, the cleaner was driving a street sweeper vehicle up and down the factory floor. Which apparently, he had been doing every day, even though the factory had not been used for months!

The company's history was quite complex and several factors caused its insolvency. However, it over-emphasised, and over-delivered on the importance of keeping its customers happy. This was a misguided attempt by the director to focus on just two aspects at the expense of all other business aspects critical to its survival.

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