You can’t have failed to notice the increasing numbers of insolvencies. Business failure is a normal part of the business cycle – less robust businesses fall off and new businesses start up. But I think we can all feel the increased uncertainty around Brexit and the election. And it’s undoubtedly delayed many business decisions.
I saw an article in the business press this week about a company with a 42-year trading history going into administration, taking many jobs with it. The reason for the demise was “the loss of a major customer and the general economic downturn”.
When I hear this has happened, I feel really bad for the owners of the business and their staff. But I also feel it was predictable and avoidable. And such a waste of an otherwise good business.
The dangers of over-reliance on a key customer are very real in any economic climate – if you rely on one customer then you’re at risk. End of.
Uncertainty makes everyone jumpy and can put the spotlight on key suppliers, making your position more vulnerable.
What can you do about it?
Key customer reliance and trading in uncertainty is something we train our clients to become resilient to; creating a financial strategy that means this story won’t ever be about them.
If you rely on one key customer than you’re more at risk than other companies, so you need to do all you can to mitigate that risk.
I find that my clients in this situation are doing such a good job that they keep getting more work from them, making the situation even riskier.
The classic question I get asked is: should they turn that work down (and possibly risk losing them) or make hay while the sun shines?
I get this is a tricky situation, but you need to understand the risk you’re taking.
My view is that you should use the profit from this client wisely to invest in things that will make your business more secure. And build strong financial reserves that mean you could still operate if the worst happened and you lost them.
Here are my top tips for reducing your risk if you have your eggs in too few customer baskets:
- Know your numbers – every month you must know what percentage of your sales are with your top customer – anything over 20% is too risky.
- Know what your profit would be if you didn’t have that customer – your goal is to make sure you can still make a profit and pay the bills if you were to lose them.
- Consider insuring their debt if losing what they owe you would hurt your business.
- Build buffer cash; essential in any business but doubly so if you have one key customer – you must build up reserves that would keep paying the overhead if the worst happened. I recommend at least 3 months’ overheads, kept in a separate account that you Do Not Touch.
- Make sure your VAT and Corporation tax is put away in a separate account and absolutely never use it for cash flow.
- Diversify your sales – build up other customers to reduce the percentage reliance and keep a close eye on your numbers each month, focussing your marketing efforts on reducing risk.
- Really look after them – don’t give them any reason to dump you!
Getting into difficulties because of customer reliance is such a cliché, and so avoidable. Please promise me you’ll follow these tips and I won’t hear about it happening to your business.