Posted by Neha De
September 1, 2020 | 3-minute read (488 words)
Finance consultants will tell you that if a single customer accounts for 10 percent or more of your revenue, or if your largest five customers account for 25 percent or more of revenue, you have a high customer concentration. Unfortunately, that’s not a good thing, because if you were to lose one large client upon which your company is heavily dependent, the very survival of your business could be in jeopardy.
A more diverse client base mitigates risk and provides stability, along with additional financial security. It also gives businesses the opportunity to work on different types of projects with a wide variety of people.
Let’s see how developing a diverse mix of clients can benefit your business.
- Mitigates Risk: Relying too much on a couple of big accounts could put your business at risk, because if those customers decide to use another vendor, or if they go out of business, then you lose that customer and also lose a large part of your revenue. Calculating client diversity allows you to determine how insulated your business is from any large-scale domino effect resulting from a reduction in demand or economic problems your customers may face.
- Provides Cash Flow Security: While it’s good to have a few large, anchor customers to keep the cash flowing so you can meet a certain baseline every month, taking up one-off projects and having smaller clients that swing every month can help boost certain months and ensure interesting work.
- Helps with Capacity Management: Having underutilized employees can be stressful for both you and your team, and dependable customers are essential for time management. While your anchor clients may give your team enough work every month, having no work even for a few weeks can lead to boredom and a slip in productivity. With multiple clients, you can effectively allocate your resources to both existing and new projects.
- Fosters Creativity and Innovation: Doing the same work repeatedly can leave you and your team feeling underutilized and stagnant. And clients from different industries are likely to present new and exciting opportunities.
- Adds Value: When looking for investors or buyers for your business, your customer base can play a major role in the valuation of your company. Potential investors or buyers look for a wide client base in which no single customer is responsible for more than 10 percent of total revenue. An organization that serves multiple customers, especially those in unrelated industries, that are not affected by the same economic conditions, can further mitigate risk.
The Bottom Line
Working with one or two large customers might work for you in the short term, but nurturing a diverse customer base will ensure better financial health for your company in the long run. It mitigates the risk if the anchor client leaves, presents new and interesting opportunities for your staff members, and opens up future challenges for creating more anchor clients down the road.