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Hey, Big Spender
By: Tama Swan, Associate Editor
Issue: 2009dec

Having only one No. 1 client can leave your company at risk of failure.

During his first two years as a distributor, Hank Yuloff, CAS, president of Encino, California-based Promotionally Minded, Inc. (UPIC: 705HANK), had revenues between $200,000 and $350,000. “Most of that was made up of one very large client, whom I eventually lost because they decided to save four cents an item by buying their mouse-shaped items overseas,” Yuloff says.

Not-so-subtle hints aside, depending on large clients for the bulk of your business can have grave consequences should that client decide to reduce its orders or cease buying from you all together.

A small business risks failure if profits from one customer reach 50 percent or more of total revenue, according to a news release from the National Federation of Independent Business (NFIB). If the client were to suddenly withdraw, the business would have to redesign itself to survive. This could mean layoffs or debt renegotiation.

Entering into a contractual agreement with the client offers no protection because little can be done when a customer needs to back out of an agreement, according to the NFIB. Taking a customer to court is costly, devastates the relationship and doesn’t guarantee payment.

However, there is an upside to booking big clients that dominate your time. “Having one large customer allowed me to get my feet wet,” says Yuloff, who adds that after losing the customer his third-year sales continued growing to about $400,000. “It gave me enough income to learn the business and develop a client base.”

Yuloff adds that focusing mainly on one client allowed him to “set up shop” with it and handle all its needs in-depth. “You can invest the time and money to become part of that company’s human infrastructure,” he says.

In addition to working to develop a robust client list, the NFIB suggests capping the amount of work you’ll accept from your biggest customers. This is counterintuitive for most business owners, but it may just be the healthiest option for your business.

“I prefer to have a larger client base because diversity is much safer for your business,” says Yuloff. “The only way to keep it from being a concern is to constantly be on the hunt for new business and treat those very large clients as windfalls, i.e., put the money aside into your business reserve.”


Code Red
The National Federation of Independent Business cautions business owners to beware of these warning signs that your business is too dependent on a large customer.

If one customer is the source of more than 30 percent of total revenue, it may be time to limit growth in that account.

If any one customer were to suddenly cancel its orders or cut back sharply, would cash flow be severely disrupted?

Do you feel the need to bring on more employees to meet the additional demand of one of your clients?


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