Do you rely too heavily on one customer?

It is no news that bail-out money is not trickling down to consumers or even small businesses. What is affecting small businesses is the trickle down of business closures and belt-tightening.

Companies that get hit worst are those that rely too heavily on one or just a few customers. An old Cleveland area stamping plant which sold exclusively to the auto industry has just announced that it is closing.

Any business that relies on a single customer for more than twenty percent of its business needs to assess its risks should sales to that customer disappear. If losing those sales could deal a devastating blow, proactive measures must be taken immediately, measures like increasing marketing and sales activities and increasing operational efficiencies.

If your business relies on one company, or even one industry, for forty-percent or more of your business, you are particularly vulnerable and need to take immediate action to broaden your market. Can your products or services be used by other companies or markets? If so, develop a sound marketing strategy to attract other customers. If not, how can you either modify your goods or services or create new ones that will have broader appeal?

Now is the time to be proactive and aggressive. You can’t wait until you lose your major customer.

Suze Ormond and Business

During the Larry King interview last night with Suze Ormond, a business owner called in asking when she should close her business. It turns out that the business has no debt and pays vendors in cash, but has no reserves.

Suze’s rather incredible advice was that rather than take on any debt to pay operating expenses, she should close the business. If this woman and every other business person watching this show takes Suze’s advice literally there will be thousands, if not millions, of additional unemployed people next week. The caller’s business was in much better shape than most small businesses which have rivers of debt.

What Suze did not explore with the caller was what untapped sources of income were available, or whether there were costs that could be cut. With no current debt, this woman is in an enviable position to make sure costs are at a minimum and that she can laser focus into new market opportunities. How many business owners would love to be in her position?

Suze is right that consumers should cut back on debt. But she did not acknowledge the potential leveraging effect that taking on some debt can have in growing a business.

I would have explored with the caller what untapped potential her business might have. Can she raise prices? Can she upsell existing customers? Can she use low-cost marketing to attract new customers? Can she modify services or products to appeal to a broader market? Are there areas in which she can cut costs? I would then advise her on how she could use the untapped potential to grow the business and improve her cash position. With her enviable cash position she might be able to make significant improvements from cash flow. If not, then it would be prudent to do an analysis to determine whether a loan or line of credit would be a sound business decision.

What is your growth potential, and how do you plan to exploit it? How can you improve your cash-flow?

Who are your best customers?

There is a maxim that 80% of sales come from 20% of customers. Most companies go out of their way to coddle the top few customers. But do you judge your best customers by sales or profitability?

Clients I work with are often amazed at the results when I ask them to do profitability studies on their top tier customers. Often price breaks and other concessions are made to encourage more sales and to keep competitors at bay. The shock then comes when reality sets in and a client discovers that little or no profit is generated by these customers.

Keep track not only of sales by customer, but also profitability by customer. You should look at direct cost of servicing a customer as well as the indirect costs of supporting, responding to, and calling on the customers. If a customer is not profitable, re-negotiate with it, or fire it. Before taking on a new job or a new customer, do an analysis to make sure it will generate the income you need.