Over the years a lot of major industries have had boom and bust cycles – manufacturing, steel, auto, rubber, construction and infrastructure. Some industries have recovered from the bust phase, while others have not. A recent example of this is the oil industry. While it is showing signs of coming back, experts believe it may take years to recover, if it ever does.
These cycles affect everyone up and down the supply chain, both positively and negatively. As a general rule the smaller the company is, the bigger the impact. It is common sense – if the majority of your business is with one customer, you live and die with them.
It is easy to live with single customer dependence when things are going good. There are advantages: you know the client well, billing and accounts receivable are simpler, production and quality are easier to control, there is no need to focus on sales or marketing, cash flow is predicable and staffing requirements are consistent. Small business owners talk about how their lives can be less stressful with one major customer.
However, it is not a smart way to achieve long term success. When the bust cycle comes around the majority of owners find they are unable to recover from it. They have allowed themselves to be lulled into complacency. They have put all their eggs in one basket, which is only sensible so long as you can control what happens to the basket.
It is not possible to control the basket if you are single customer dependent.
Here are some reasons why.
• They have a lot of power over your margins, cash flow, receivables and profit.
• You are stuck with and controlled by their seasonality and volatility.
• Your ability to grow, or scale back, is limited by their budgets and production requirements.
• If you lose them, you probably are out of business.
• It makes your company harder to sell and its value less.
So, what do you do? The answer is to focus on diversifying. Create a strategic plan which focuses on limiting risk and boosting sales.
Here are some places to start.
• Commit to sales and make it a focus of your strategy. Do not wait for a downturn to start selling. You will be in a position of weakness (and possibly desperate), which is a bad time to put together estimates and bid on new contracts.
• Decide on ways to diversify. It can be accomplished in several ways – find new customers, adapt product or service for a different market, expand customer territory and change or add your operations location.
• Figure out where you are the most vulnerable and fix it (i.e. overhead, production, quality, staffing, financials).
• Start slow with smaller contracts. They are easier to sell and will give you the chance to ramp up without making costly mistakes or needing much, if any, growth capital.
Just because the industry you are in has cycles of feast or famine does not mean you have to be held hostage to it. Even modest diversification will help you perform better than your competitors, because chances are they have none. Who knows, you could be the last man standing when the cycle swings up again.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:
