Let’s discuss the importance of customer base diversification. The saying “don’t put all of your eggs in one basket” might be out of pace with modern society, but the wisdom behind the statement still stands. For businesses, it’s similar to putting all sales expectations and company potential into a single large client. When a company relies on a single large client for the bulk of its income, its destiny is inherently tied to the client. This situation is similar to allowing a passenger in the back of the bus to drive; it gives the business little control over the business’ future and no power to plan defensive business moves. If the client experiences a slowdown, disaster, or bankruptcy, then the business who relied upon the client will suffer equally without having had the opportunity to take corrective actions.
Where’s the Money?
When attracting a large customer, it’s not uncommon for a company to offer the client discounts to secure the business. While providing discounts to existing customers or prospects can boost sales, having just one large client with a discount can cut profits.
Discounts aren’t the only way that a company can lose money and reduce revenues when relying heavily on a single customer. The company may also suffer when the client is slow to pay invoices or when that company’s demands are reduced. The company may have already invested in raw materials, training, and labor. However, there may be no guarantee the discounted order will materialize – or, if it does materialize, that it will be paid.
Customer Base Diversification: Not Just for Investment Accounts
It’s doubtful that any investor would think it a good idea to invest all of his or her money in the stock of just one company. Instead, most investors diversify holdings and invest in several different companies in many different industries to better hedge against losses. In the same way, a company can evaluate its customer base. Management may want to ensure that no one customer comprises more than 25% of the company’s annual revenue. Therefore, a hedge is created against an individual client’s business slowdown, slow payment, or total loss while also balancing customers who pay full price and those who receive discounts.
Silver Lining of The Basket
CRI’s CPA team can help you analyze your customer base diversification and provide guidance on how to better diversify the risks facing your business. We can even discuss them over a Southern breakfast of eggs and trimmings.