As a business grows, it’s easy to get caught having too many eggs in one basket. By this we mean that the business is growing on the back of one key customer. It’s great while it lasts, but exposes your business to dramatic upheaval if that customer business hits problems, or their industry experiences a downturn.
Carillion, which collapsed in January, is a perfect example. It was the UK’s second largest construction company, and went bust with £1.5 BILLION in debt. Many of the 30,000 sub contractors who were employed by them were entirely reliant on Carillion, and lost everything.
To start with, it’s quite a nice situation to be in, with a major customer keeping your business busy. You can develop your business without lots of marketing effort, and know that your customer understands your capabilities and the money keeps coming in. For some businesses, their equivalent can be an agency passing them work, which in some ways disguises the reliance, as the end customers differ and its a succession of smaller projects that come through.
Over time though, if that agency decides to make a change, or that they need to reduce costs, or simply have a change of management who have preferred suppliers from a previous role, the supply of business can dry up extremely quickly.
So how can you avoid this type of problem?
Review your existing customers. Do any of them account for more than 15% of your business? If not, you’re probably OK, but if they do, you are in the ‘too many eggs’ trap and need to take steps to make some changes.
If any one of your customers account for more than 50% of your business, you are at serious risk and should take rapid action.
What should we do?
- If your biggest customers are responsible for more than 50% of your business, check their financial position. Put some monitoring systems in place so that you are immediately aware should anything start to slow.
- Are their accounts up to date?
- Are they paying you promptly?
- Are the orders continuing to come through at the same rate?
- Ensure you’re collecting your payments promptly, so that you are risking as little as possible financially. Direct Debit is by far the best way to collect payment, particularly if the amounts are fairly even, but deposits, and stage payments will help too. Make sure you aren’t owed any large amounts wherever possible to keep your exposure small. Large companies will always look for favourable payment terms, but keep those as short as possible. Direct Debit is ‘Ideal World’, but avoid long payment terms, particularly in excess of 90 days, wherever you can.
- Start to look for similar customers, but ideally in a different industry. This will reduce your exposure should the industry contract. More, smaller customers mean more effort in some areas, but can reduce your exposure if you can find them. This is also more attractive to investors or lenders should you need to raise finance at a later date.
- Take out bad debt insurance cover, which will mitigate any losses should the worst happen. This can seem like an unnecessary expense when everything is going well, but can help you sleep at night should your largest customer issue a profit warning, or stop returning your calls!
Business is about balancing risk, and whilst we would never advocate rejecting business from a stable source, to be successful and avoid jeopardising your hard work, it’s essential that you take all necessary steps to avoid putting too many eggs in one basket.
If we can help you identify the areas of risk within your business, or find ways to protect it from being overly reliant, then please get in touch. This is an issue we have seen in a large number of businesses over the years and we have helped move many businesses onto safer ground, before it’s too late!