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The Three Stages of a Customer

A Handy Tool to Identify Your Customer’s Financial Condition

Over the years I have found customers fall into three specific stages while doing business on open credit with our clients. Learning how to identify these stages “arms” my clients so they know exactly what to do and when – and their expectations of payment are consistently correct.

Stage One

We call this the partial payment stage. Almost every company in the world has gone through this stage where they were forced to “partially” pay their open invoices on the majority of their accounts payable. This stage happens for thousands of reasons, i.e., aggressive growth and funds are tied up in managing the growth, terms dictated by their clients who pay slower than net 30 (the big boys abuse the small guy all the time), mismanagement, etc. This stage can be identified on any aging because the customer is either partial paying on specific invoices or only paying the smaller invoices while larger ones age.

Stage Two

We call this the survival stage. Companies who are in this stage are paying only their main suppliers as well as bills which allow them to survive, i.e., electric bills, payroll bills, phone bills (with the Internet this bill has begun to move away from survival mode), lease, utilities, etc. The survival stage tends to be where customers lose their ability to communicate well and they start to avoid all contact from those clients they owe money because they can not pay. This is common when a dramatic loss occurs, i.e., a major client going bankrupt, lost contracts, novelty products losing their interest, loss of management, mismanagement, etc. This stage can be identified on any aging because the open account ages without communication from the customer and without any partial payments – 90-plus column is normal. Unfortunately for our clients, this is the time to place the account for collections. Waiting now will allow the file to move quickly into stage three – which is bad.

Stage Three

We call this the give up stage. Customers put their lives into their business so when they give up it’s too late. The “give up” point is the point of no return – where customers realize they cannot make it work. Classic timing for this is during holiday times when owners look at their families and recognize their stress is spilling over to them – this cannot continue and soon the customer decides to close their doors. Once decided, these companies will liquidate all of their assets (if any exist) and keep those proceeds instead of paying down any of their existing debts. The customer says things like, “Do what you have to do,” “You can’t get blood from a stone,” “What do you want me to do when we have no money,” etc. Unfortunately this stage means nothing can be done to stimulate the customer’s desire to pay and it’s time to write off the debt. Placing this account for collections with any expectations of payment would be misleading so it is critical to recognize this stage.

To help you identify the three stages, JSD has a free worksheet available for all clients and potential clients called the Vital Warning Signs. Contact your representative for your copy and begin arming yourself. 

ABOUT THE AUTHOR: David “Doc” Van Newkirk is director of JSD Management, Inc. He can be reached via email at JSD Management, Inc. is an AFSA Business Solutions partner. For more information on JSD and other AFSA partners, visit

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