The customer you should let go.

Many businesses have a customer who queries every invoice, moves the goalposts and then asks why it took so long, and has done so for years.

The question is whether they are profitable. Owners often have not worked it out, because the cost of that customer does not appear on any report. It appears as evenings, as rework nobody logged, as a quote you rushed because you were dealing with them instead, and as good people quietly deciding they would rather work somewhere else.

Why don’t the accounts show this?

Your profit and loss shows revenue by month, not profit by customer. Unless someone has deliberately built customer-level costing, every customer in your business looks equally good on paper, because the only thing you can see is what they paid you.

A customer can be your third biggest by turnover and your worst by contribution at the same time. The cost sits in three places nobody counts: unbilled time, working capital, and the opportunity you did not take because your capacity was already spoken for.

What does one customer cost?

This case is illustrative.

A service firm has a customer billing £18,000 a year. Direct cost of delivering their work is £12,600, so the gross margin is £5,400 — a 30% margin, against a house average of 42%.

Now count what nobody bills. This customer takes about six hours a month of owner and admin time that is not in the scope: the calls, the rework, the meeting to re-explain what was agreed, the chasing. That is 72 hours a year. At an internal cost of £45 an hour, that is £3,240.

• Revenue: £18,000
• Direct delivery cost: £12,600
• Unbilled time, 72 hours at £45: £3,240
• Contribution: £2,160 — a 12% margin.

Compare that with an average customer of the same size: 42% margin is £7,560, and one hour a month of unbilled time costs £540, leaving £7,020. The gap between the two is £4,860 a year on identical turnover.

Then the cash. This customer pays on 74 days against your 30-day terms, so an extra 44 days of their annual billing is permanently tied up in your business: £18,000 × 44 ÷ 365 = £2,170 of working capital funding one relationship, every day of the year. Our guide on profit is not cash covers why that number hurts more in a growing business than a flat one.

The 72 hours are nearly two working weeks of owner and senior time, which could go to the customers you want or to winning one more of them.

How do you find yours?

Set aside one afternoon.

• List every customer with what they billed in the last twelve months. Use the sales ledger.
• Take off the direct cost of delivering their work. Materials, subcontractors, the hours of the people who did it.
• Estimate the unbilled hours. Ask whoever deals with them most.
• Check average days to pay for each of the top twenty.
• Rank by contribution, not by revenue. Then look at the bottom five.

The result can be surprising: the customer you thought was the problem may be fine, while a quiet, undemanding one is served at a loss because the price has not changed for years. Our owner time audit gives you the unbilled-hours figure if nobody is tracking it.

Can you fix it before you end it?

Try two things before letting a customer go.

Reprice. A 12% margin customer at a 25% price increase becomes a perfectly decent customer. On this example the increase is £4,500. Our guide to pricing for profit works through how to put the number in front of someone without apologising for it.

Reset the scope. Often the arrangement, rather than the customer, is the cost. Agree written scope, defined response times, a named contact instead of everyone ringing the owner, and changes quoted rather than absorbed.

If you have tried both and the arithmetic has not moved, end the arrangement.

How do you end it?

• Give notice. Enough time for them to find someone else — a month, a quarter, whatever is fair for the work.
• Keep the reason short and about fit. "The way we work has changed and we are no longer the right firm for you."
• Do not itemise their sins.
• Finish the outstanding work properly. How you leave is what they will describe to other people.
• Offer two names of firms that suit them better.
• Never do it in temper. If today was a bad day with them, have the conversation next week instead.

If the customer you want to lose is also large enough to matter — more than about a fifth of your turnover — do not start there. Replace the dependency first, over two or three quarters, then have the conversation from a position where their answer does not decide your year. Difficult client conversations goes further into how to hold that line without escalating it.

What else changes when you let a customer go?

A business that will not let a customer go often doubts it can replace them, and that belief shapes what you charge, what you agree to, what you tolerate and how you speak about your own work. Discounting comes from the same belief.

Your team notice too: every hour spent placating someone who treats them badly shows them what the business accepts. The decision comes up often in leadership coaching.

You also get back seventy-two hours and about two thousand pounds of working capital, which can go to a better customer. Our guide to improving margins covers how to use the recovered capacity.

What to do this week

• Rank your top twenty customers by contribution, not revenue.
• Ask whoever deals with them most how many unbilled hours the bottom five consume.
• Pick one and decide whether it is a price problem, a scope problem or a fit problem.
• If it is price or scope, put the conversation in the diary this month.
• If it is fit, write the notice letter now and send it when you are calm.
• Before you release the capacity, decide what it is for.