Your company is doing great! Orders are up. Revenues are through the roof. The company runs 24/7 to keep up with demand. So, what’s the problem?

Well, one of the biggest problems small businesses face is relying on one or two large clients who provide a significant amount of business. These important clients are an invaluable asset. They keep cash flowing through the company.

Unfortunately, if your company relies on one client business, or a small group of clients, they can also be one of the biggest risks you face.

If your No. 1 client – the one who covers 50% of your company’s monthly expenses – decides to go with a different vendor, 50% of your business just walked out the front door.

You still have the same number of employees. Payroll is due. The only problem is, you don’t have enough cash flow to keep the company afloat.

You are what’s called a “captive company” – a company that relies on one or two key clients to generate cash flow and grow your bottom line. It’s kind of scary, isn’t it? If a competitor moves in with lower prices or more product options, your long-term relationship with your best customer may fly out the window.

And so does your company – the business you’ve spent all those years building – gone when you lose your most important client. Poof!

The Warning Signs You’re in Too Deep

How do you know you’re in too deep with a single client? How do you know you’re a captive company at risk? Here are some signs it’s time to review your client list.

When one client or customer accounts for 30% or more of total revenue, that company has considerable leverage over you. And, if the management team of that company knows just how much you rely on them, they have leverage to negotiate better terms.

If you hire new employees to handle the work of one or two big clients, the problem of relying on the goodwill of a big client becomes more serious because more people depend on that one big client for work and a paycheck.

If your best customer or client suddenly cut back on regular orders by 50%, you might not be able to make payroll or pay the rent on your office. You might not even have a company anymore.

You may rely on contracts with one or two large companies, believing that a contract protects your company. It doesn’t. Chances are, if you or the person on the other side of the table is reaching for a written contract, you’ve already got big trouble. Are you going to take the other company to court? What’s that going to do to your current operations?

Even if you have an ironclad contract, that paper may be worthless if your biggest customer goes under. You can’t get blood from a stone, and you may not get more orders from a company in bankruptcy.

How to Stop Being a Captive Company

Review your company income to determine the percentage of total revenues your best customer brings in. If it’s more than 30%, start looking for more clients. If it’s more than 50%, start looking for new clients NOW!

Don’t become complacent. Keep current clients happy, of course. But keep beating the bushes for new clients. Keep promoting and marketing to attract an ever-growing client base. The more company revenues are spread across more customers, the more secure your company becomes. New clients, good clients, repeat buyers, the regulars in your restaurant – these are the people and businesses that keep your company growing.

Determine how profitable that big client is. Sure, that client may generate revenue, but if margins are constricted, you could do more harm than good sticking with one or two key clients. If your best client also happens to be less profitable than smaller clients, you may want to adjust your business model or expand your service region or product list.

Stay current on industry and news trends. If some or all of your business comes from government contracts, and Congress defunds your best client’s project, you have a big problem. If market shifts put that company at risk for a downturn, that will also endanger you.

Turn down more work. It runs counter to everything entrepreneurs believe, but if you become increasingly dependent on a single customer, there’s not a lot of margin for error. If you can turn down work for your large client without putting your relationship in danger, it’s better to spend your time and effort on jobs for other clients.

Be prepared to terminate a business relationship. With company revenue streams spread out, you have more control and more options available to grow your business without depending on a single client.

Diversify your client portfolio to enjoy greater business security. You may even see a significant jump in your company’s bottom line as you secure more clients and spread business risk across a wider list of businesses.

So, are you a captive company? Does one client generate 30% or more of your company revenue? Time to find new sources of revenue, new clients that deliver regular work, and keep the company doors open.

Escape captivity and see your company expand.

 


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.