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by Richard Gourlay - Wednesday, 29th August 2007

The critical task for any company is to secure sales and to achieve them at the right margin. That means products and services which customers want, preferably repeatedly, and which these customers can't or don't want to acquire elsewhere.

The trouble begins when a business lacks or loses an element of this distinctive competence. Suddenly it cannot be assured of repeat orders. Its margins come under pressure because it is constantly beaten up on pricing.

And inevitably customers feel little obligation to pay on time because they know they can always go elsewhere to restock.

This is not to exonerate the pay-as-late-as-possible culture, which infamously is nurtured within some notorious large organisations in this country. One hopes the executives of these companies have a long wait at the Pearly Gates after they shuffle off this mortal coil.

But one also wonders whether some of the most vehement complaints about the late payment of debts do not in fact emanate from businessmen and women with customers who don't really need them?

If you cannot find a pithy description of your product or service that distinguishes your company from the competition, then you risk falling into the category of "not being needed."

These three characteristics of a commodity, or non-distinctive business - margin pressure, lack of repeat sales and late receipt of debts - are frequently accompanied by a fourth scourge - under-capitalisation.

It goes without saying that a business which can extract cash from customers in advance of a sale is able to use its customers as a financier to some extent, and need provide less of its own working capital.

Conversely, however, if customers of a particular business in practice only pay after 120 days instead of after the requisite 60 days, for all the reasons noted above, then the owners should recognise this as a business reality and capitalise the business accordingly. I suspect this rarely happens.

Indeed, I wonder how many of the owners of businesses who complain of being paid late are also trying to run their businesses on a woefully inadequate capital base.

Furthermore, how many have also recently distributed to themselves earnings through bonuses or dividends which should have remained within the business to fund working capital?

Of course, most businesses do not in fact have anything truly distinctive to offer.

There are rows of apparently similar fashion retailers alongside an abundance of minutely differentiated coffee shops and, of course, the banks and building societies which are peddling the ultimate commodity product - money.

These companies survive and thrive because they have convinced their customers that they are very distinctive, that they have drop-dead service or a line of products that is really different.

While the large high-street retailers clearly have the benefit of strong finances and deep pockets for big promotional spending, great service, effective advertising and imaginatively targeted marketing should not be beyond the reach of any company.

First published in March 1998. Still sound advice.

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