There are always going to be those business owners that gamble with high risk strategies. One example is going after the mega large contract award. Often companies using this strategy bet everything on one customer or a few contracts. When they loose in today’s economic times, they often can’t recover from it.
I met with a business owner last week who is oblivious to the risk he puts his company and its employees in on a daily basis using this strategy. Granted it has worked several times in the businesses’ 20 year history, but I don’t think it will work this time. The company I am writing about is a staffing company. Its clients are very large and award contracts competitively. In one case, for the last 5-6 years, the business has relied on the income from one contract that provided over 50% of the company’s revenues. I have been engaged with this client for several years and had excellent success helping the company obtain working capital, but limited success convincing the owner to go after a number of much smaller contracts instead of the very large ones.
My position proved itself out recently when the business lost the contract that caused the business to change overnight from revenues of $10 million to a $5 million a year. The business lost the contract simply because it was time to rebid the contract and the customer chose a different vendor. The business owner was stunned. He called me and asked me what he should do. I bluntly suggested he should have been spending the last several years winning 5 new $1 million contracts rather to spread out the risk in case this very large source of revenue went away.
Regrettably, this business hasn’t had a new award of a contract in the two years I have known them because the owner only chased big customers and big contracts. He believed he would win one sooner or later. He hasn’t.
Now it is time to scramble to make up the revenue. The problem is several-fold. The business has not been out building a new sales pipeline of smaller deals with shorter sales cycles, so there is nothing in the wings that it can try to hustle and close and even if it does quickly win one or two small contracts it will be doing so in a significantly tighter market, one where the gross and net margins will be much smaller. So the business will be replacing moderately high net income business with very low margin revenues. Since this business has not won a large contract in five or six years, I have no solid confidence that he will win one now.
It is especially important in this financial environment to have a diverse customer base and maintain as low a concentration of sales to any one customer as possible. A customer that accounts for more than about 10 – 15% of your annual sales year over year may be too big for you. If they fail or move their business, you may loose yours. Bankers and investors look closely at this concentration of sales/credit.
If you have a customer with a large concentration of sales, the strategy to reduce your exposure should be to find several new customers to sell to so that the concentration is diluted.
When you do have an 800 lb gorilla as your main or only customer you must be prepared to make immediate changes to the way you do business if the customer goes away. Trimming variable expenses quickly and your own owner’s draw should be immediately considered. Consider selling assets to raise cash. Think creatively about reducing fixed expenses. Do what you have to do to get your income and expenses in balance as quickly as possible. There aren’t going to be any banks running to your rescue.
On a go forward basis, try not to put all your revenue eggs in one basket.
Remember that you aren’t just gambling your business on risky strategies; you are also frequently gambling your own personal assets. If you have signed a personnel guarantee you are responsible for repayment of any loans, leases, and other obligations that may be outstanding when you close your doors.
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