I see it time and time again — businesses put all of their eggs into 1 or 2 customers, neglecting the fact that they can count their revenue sources on one hand.
Usually companies don’t even notice the mistake they are making, but smart money puts its dollars behind diversity. As a leading lender to the online digital media community, we have the opportunity to hear the intricate details of several businesses a day. Our job requires that we ask about financials, credit history, and most importantly customer strength. The biggest red flag (and the one I encounter most often) is hearing that a company’s revenue comes from a limited amount of partners or customers.
A small sampling of customers signals weakness. It signals vulnerability. It signals a business that will have trouble getting funding of any kind. Why? Because what happens when one of your biggest revenue sources decides not to pay or to go with a different vendor? You’re stuck empty-handed, without thousands and possibly even millions in revenue that is critical to you operating your business.
Here is a good example:
Three weeks ago we received a call from an executive at an interactive agency who spent 30 minutes begging to have us increase his company’s concentration exposure to one of the major ad networks.
He insisted the ad network partner would make good on their payment. He told stories of a staff member who had a cousin at the company, a giant kick-off dinner the two companies shared the week prior, and unending praise of the great relationship the two CEO’s shared. Over and over, he told me that there was ‘absolutely no way the company would not pay the invoice.’
We said no. Concentration issues can be fatal to a business and they are clear warning signs to both lenders and investors. If a client does 50% of their business with one company and that company decides not to pay, they’re left with only half of the revenue they were expecting. However, if that client were to have done 10% of their business with that same company, they would have only lost out on 10% and can use other accounts to make up for the loss. It’s simple math. Less dependence on a couple big accounts and more focus on multiple sources of income (even if this means smaller accounts) will be far more beneficial to your business in the long-run.
Like clockwork, three days later this company received notice the ad network was not going to pay. A single phone call resulted in the loss of almost 7 figures in revenue.
This story is by no means unique, it happens every day. No matter how many connections or ‘signs’ lead you to feel comfortable regarding your relationship with a certain business client, there is simply too much risk in concentrating your business on a handful customers. Heed the wise advice of the investing sages: Diversify your portfolio. This holds true for your customer base just as it does your investments. When betting on your customers, always put your money on both quality AND quantity. A diverse group of strong business partners will allow your business to grow and flourish the right way and it will show lenders and investors that you understand what it takes to build a solid foundation.