Author: Bob Press (TAP Financial Partners)
For a small business, increases in revenue are oxygen, and critical to maintaining position and growing market share. Conversely, those unable to grow income and solidify cash flow put both their short and long-term business prospects in grave danger.
Most companies start with smaller customers and build on that base, gradually increasing its ability to deliver larger products and services more consistently. Unless your business is completely online, your COGS (cost of goods sold) as a product or service business generally increase as your revenues increase, and therefore so do your cash flow needs. Managing growth is a very difficult and ongoing process.
Sometimes, looming in the distance, is the BIG CUSTOMER. Whether it’s a relationship with a large professional services firm, a utility company, or a big box retailer, the temptation is to put all one’s energy into landing the new account. After all, if it can be a game changer for your small business, isn’t “yes” the obvious answer to the question about whether all available resources should be dedicated to the pursuit of this new business?
In reality, the better answer is most likely “maybe.” While no two situations are identical, large customers bring with them unique questions that must be part of the decision-making process:
- What is their approval process and are there significant barriers to entry (rigorous demands in regard to product safety and increased insurance requirements, for example) you may not be accustomed to?
- If you are delivering products, how will you have to work within their logistics chain
and how will that impact your own supply chain and financing? - What will be the effect on your cash conversion cycle given what will now be a dependence on how quickly the big customer pays its vendors?
- Are there additional costs of doing business with large retail customers, such as slotting fees, in-store advertising, or shelf rental and placement?
Lastly, and most daunting, is the concentration of risk a large customer represents. While managing one relationship is usually easier than many, risk is increased when your business is dependent on the revenue generated by one large account, especially since it’s possible to lose that business, sometimes through no fault of your own.
Advice from our experts is a balance, whenever possible, between large and small clients and an understanding of how that prospective big account can change how you do business. Landing the large client and managing that relationship has allowed many small businesses to propel themselves to the next level. It does, however, carry its own risk profile.
TAP Advise can help business leaders understand and mitigate the issues raised in this post. If you are interested in further discussing how to manage your current customer base and how to best expand upon it, please contact us at info@tap-advisory.com
0 Comments