For project based businesses in the construction industry in particular, the problem of being over exposed on a project, or with a specific customer is very common.
Also common is payment disputes, customers going bust or exceptionally long lead times to bill settlement.
Whilst it easy to say have more customers or negotiate better terms at the outset, these types of relationships are often offered by the customer on a 'take it or leave it' basis.
For businesses that take on this type of risk with their eyes fully open and are aware of the risks they are taking, the risk can be managed.
Phased billing can be used to keep the cash flowing in and the contract can be structured to allow withdrawl of services if payment is not made on time.
However, if the main contractor goes bust (it happens - remember Carillion) your future may be in the lap of the gods.
Keeping the part of your business you are risking to no more than 20% to 25% (of your total turnover) should mean that the loss associated with a customer failing on you will be tough, but survivable.
Most people will recognise the problem with only having one customer. If the customer goes bust you go bust too - that is usually the case.
Yet it is surprising how many people build businesses on the back of a subcontract supplier relationship to a single customer.
The only good thing about this is the relationship is clear, the risk is exposed and a conscious decision has been made to accept the risk.
A less good situation is where the company has 10 customer say, but one of those customers is responsible for 80% of turnover. In this situation it can be easier to ignore the risk. When the fall comes it is more of a shock, but probably no less devastating than if the customer had been supplying 100% of the business. The result is the same - the business cannot survive the shock.
These relationships are relatively clear and as a rule of thumb it is wiser if a single customer does not contribute more than about 20% of business overall. For most solvent businesses, the loss of 20% of their custom would be a nasty shock, but survivable.
What is often less clear is where a business has many customers, but a single channel of getting to them.
So let's say you are selling online through Ebay. You have a good reputation and people regularly buy from you, or perhaps the reviews you are getting means an ever increasing chance of making a sale on a particular search. Then one day Ebay changes their rules, or you do something in error that breaches the Ebay terms and conditions and your account is suspended. The business is gone.
The channel was in fact the customer and you have lost it. The most risky set-up in this respect is selling on your own website and relying 100% on search queries on Google to be found. A change to the search rules has seen many well established businesses disappear from search results overnight.
So, a bit like dealing with customers, it makes sense to limit exposure to specific sales and marketing channels to no more than 20% to limit the impact a change of rules, or accidebtal rule infringement can make on the business.
