At the risk of sounding like alarmists, we hate business concentrations and want to help you take positive steps to avoid them.
Concentrations are one of the greatest risks you can take in business because they cause havoc and destroy companies. Having a concentration is kind of like carrying a rattlesnake in your pocket — you’re eventually going to get bitten.
Over the years we’ve seen many businesses harmed or destroyed by concentrations. So what is a concentration? It’s anything that could seriously hurt or cause your business to fail if it suddenly went away.
Let’s look at some examples.
A sales/customer concentration can be one of the deadliest and is often the first thing that comes to mind when you mention concentrations. It occurs when a business relies on one or two customers for the majority of its revenue. The problem occurs when a business owner gets a call from his company’s main customer, telling him they’re taking their business elsewhere. This is a devastating loss that can potentially shut down the company unless those sales are replaced immediately.
Most companies don’t intentionally seek a situation where the majority of their business is concentrated with one customer. But these opportunities always seem so wonderful and it’s easy to overlook the danger.
You might think your customer is a sure thing for years to come but you can never count on another business to be loyal or remain viable. They could go out of business, be bought out by another company, or lose business themselves and have to shrink expenses. In other words, you can have a great relationship with these customers but still lose them.
Aside from the risk of loss, these customers are problematic because they change the way you run your business. You’re always worried about keeping them so, in a way, they take over control of your company.
The answer to customer concentrations is to continually look for ways to expand and diversify your customer base. If you currently have a profitable customer concentration, reinvest some of that money into efforts to obtain new customers.
Similar to sales, an industry concentration is dangerous. This occurs when the majority of your customers are in one industry. If that industry experiences a downturn or major shift, you could lose the bulk of your revenue. We know of a once successful manufacturer that had four major customers, all in the same industry. Over a couple of years, that industry’s work went overseas. The manufacturer lost 70 percent of its business over a 12-month period and went under.
If your company primarily serves a particular industry, always be on the lookout for ways to expand your product line or service offering outside that industry. And be willing to alter your business if changing trends demand it.
With a vendor concentration, you rely on a particular vendor to provide essential products or services without having a back-up plan. This is especially dangerous when a vendor provides something difficult to obtain elsewhere, such as certain services, products or materials. You should always have a Plan B for what you would do if that vendor suddenly went out of business or you no longer wanted to work with them.
Employee concentrations occur when you rely heavily on a particular employee for a critical function. Let’s say you employ someone to operate a particular piece of equipment and no one else is cross-trained.
Your business could come to a halt if that person left. Or suppose your salesperson or customer relations person has complete access to your database and maintains the primary relationships with your customers. If that employee decides to leave or is let go, you risk having your customers leave with them.
We especially want to caution you to never “step up” based on expectations surrounding a concentration. A step-up is a major change in the business that increases capabilities and resultant financial obligations so that you can handle additional sales.
A friend once owned a business having a concentration with one customer. When that customer promised a huge influx of additional business, our friend expanded into new space, bought a lot of new equipment to handle the increased production, and hired more staff. After all the new capabilities were in place and our friend had incurred significant additional financial obligations, the customer decided to move its business elsewhere and our friend lost everything.
If you’ve never given any thought to concentrations in your business, do it now. A good way to look at potential concentrations is to pose the question, “If this were to suddenly go away, could we survive?” If the answer is no, you need to formulate a plan and take steps to correct the concentration as soon as possible. In other words, get that rattlesnake out of your pocket before you get bitten!
Laddie and Judy Blaskowski are partners in BusinessTruths Consulting, Inc. and several other businesses, and authored The Step Dynamic: A Powerful Strategy for Successfully Growing Your Business. They can be reached at Judy@BusinessTruths.com.