Concentrated Accounts: Dream Clients or Your Worst Nightmare?
Concentration is defined as the amount of accounts receivable (A/R) due from a single customer or when a few customers account for a sizeable portion of a company’s total sales. While landing a large, VIP customer is a small business owner’s dream, the flip side is that losing a VIP customer (or giving him the upper hand) can be a small business owner’s worst nightmare. Some of the dangers of having a concentrated account include:
- Larger companies constantly search for the best quality at the lowest available price. As such, they change suppliers whenever a better deal pops up; there’s no supplier loyalty. Sometimes, too, the buyer you’ve dealt with leaves the company or a new buyer is placed on your account. Where does that leave you? Many times, out the door. You’ve built up your business to service a level of revenue that may fall off if you lose that concentrated account.
- If you have revenue concentration with a customer, chances are you’ll likely have A/R concentration with them as well. This, too, is a danger area because A/R concentration means that the A/R may become uncollectible if your VIP customer decides to leave you without paying.
- Even if a VIP customer doesn’t leave, your cash flow can be affected by that concentrated account. Cash flow is subject to the payment habits of that customer and if that account slow pays you, there goes your cash flow.
- You know VIP accounts are going to squeeze you on margins. You won’t be as profitable (if profitable at all) yet this customer will take up more of your time than your other customers; a big danger.
- And what if there’s a problem with a customer’s product? Sales could be in jeopardy which puts revenue in jeopardy which could put this customer out of business. If you have a large concentration with this company, you could go out of business, too.
All that said, revenue concentration is a reality among small businesses. It’s difficult to say “no” to a big order. The benefits are easy to see: growth, increased profits, and expansion opportunities; the dangers are often overlooked. You can mitigate the dangers by:
- Actively pursuing other customers. Don’t rest on your laurels just because you’ve “bagged” a big client. Diversify your customer base.
- Not allowing a VIP customer to roll over you. Make sure you stay in charge of the relationship.
- Not being afraid to say, “No.”
- Asking for expedited payment terms (offer a discount to get them).
- Being prepared for the worst case scenario. Make sure you know exactly what you’re going to do if one of the dangers of a concentrated happens.
Bottom Line: If you choose to take the risk, you need to do so with your eyes wide open, and you need to be honest with yourself about all the possible outcomes. As they say in scouting, “Be Prepared.”