How to Become Less Dependent on Large Clients:One of the central goals of most small companies is to develop a number of large, steady customers. This is the foundation for long-term growth and stability. When you have customers you can count on month after month, the secure cash flow gives the opportunity to consider expanding in new directions and tapping new markets. The key word is a number of customers. This doesn't mean one large customer. It's always tempting to continue taking on more and more new business from an existing customer, but when one customer takes up a disproportionate amount of staff time, a small company begins walking on the edge of failure.
Warning signs your business is too dependent on a large customer:
When one customer becomes the source of 30% or more of a small company's total revenue, very real and even potentially catastrophic financial dangers emerge.
If such a customer were to suddenly cancel all orders or even cut back sharply, cash flow would be badly disrupted. Expenses would continue, but suddenly there wouldn't be enough to cover them. The dangers are even greater when additional employees have been brought on to meet the increased work demands. These employees would suddenly be extraneous if you lost work with the client.
When one customer becomes the source of 30% or more of a small company's total revenue, very real and even potentially catastrophic financial dangers emerge.
If such a customer were to suddenly cancel all orders or even cut back sharply, cash flow would be badly disrupted. Expenses would continue, but suddenly there wouldn't be enough to cover them. The dangers are even greater when additional employees have been brought on to meet the increased work demands. These employees would suddenly be extraneous if you lost work with the client.
The downsides of overdependence:
When one customer's business grows to 50% or more of total revenue, a small business becomes at risk of failing should the customer suddenly withdraw. This can happen with no warning.
If a large customer of this type withdraws, a small company needs to completely redesign itself to survive. This would include potential layoffs, negotiation of debt burdens, sale of equipment, etc. Clearly this would be an unpleasant situation.
One might think that having a secure, mutually agreed upon contract with a large customer would be enough to assure continuing business, at least through the contracted date. But if a customer needs to back out of a contract for any number of reasons, there's little that can be done about it. No one wants to take a former good customer to court, ruining any chance of reestablishing the relationship in the future. Even if a lawsuit were successful, it would be expensive and it could take years for any payments to be made (assuming that the customer was even able to make such payments).
When one customer's business grows to 50% or more of total revenue, a small business becomes at risk of failing should the customer suddenly withdraw. This can happen with no warning.
If a large customer of this type withdraws, a small company needs to completely redesign itself to survive. This would include potential layoffs, negotiation of debt burdens, sale of equipment, etc. Clearly this would be an unpleasant situation.
One might think that having a secure, mutually agreed upon contract with a large customer would be enough to assure continuing business, at least through the contracted date. But if a customer needs to back out of a contract for any number of reasons, there's little that can be done about it. No one wants to take a former good customer to court, ruining any chance of reestablishing the relationship in the future. Even if a lawsuit were successful, it would be expensive and it could take years for any payments to be made (assuming that the customer was even able to make such payments).
Don't be lulled into your comfort zone:
To avoid such potential problems, a small company simply must continue marketing and bringing in new business, thereby keeping any single customer's business at a safe percentage of total revenue. It's tempting to just allow an existing customer to shove more business at you. After all, it's easier than marketing. But you need to keep any potential adverse impact to your company at a minimum. Continue marketing, even after your reach your "comfort zone." The new business you'll have in two or three months will be the direct result of the marketing you do today.
To avoid such potential problems, a small company simply must continue marketing and bringing in new business, thereby keeping any single customer's business at a safe percentage of total revenue. It's tempting to just allow an existing customer to shove more business at you. After all, it's easier than marketing. But you need to keep any potential adverse impact to your company at a minimum. Continue marketing, even after your reach your "comfort zone." The new business you'll have in two or three months will be the direct result of the marketing you do today.
Swallow hard and keep your company safe:
One way to put a ceiling on the amount of business a single customer gives you is simply to turn it down. This is risky because you don't want to be seen as not being able to supply needs and you don't want to customers to contact your competitors. Many successful companies have had to limit business with individual customers, or have had to turn away new business that would have been a dangerously large part of total revenue. As hard as it may be to turn away business, especially in an uncertain economy, in some circumstances it may be better for a company in the long run.
One way to put a ceiling on the amount of business a single customer gives you is simply to turn it down. This is risky because you don't want to be seen as not being able to supply needs and you don't want to customers to contact your competitors. Many successful companies have had to limit business with individual customers, or have had to turn away new business that would have been a dangerously large part of total revenue. As hard as it may be to turn away business, especially in an uncertain economy, in some circumstances it may be better for a company in the long run.
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