Beware of the 800 lb gorilla

 

 

 

 

 

 

 

 

by Cathy Sedacca

It usually starts out well.

A fun, new client with a bright future. An exciting “win” for the sales department. A promising new relationship.

But—before you know it—if you’re not careful, you may have an 800-lb. gorilla on your hands.

What’s the problem?

While everyone appreciates a big customer, one that comprises a significant percentage of your revenues can create problems.

For weeks, months and even years, your relationship with your biggest customer may go swimmingly.

The problem is, one day—potentially without warning—that customer may be gone.

The result?

Revenues instantly tank. While management is reeling from the swift change in circumstances and working on a downsizing plan, expenses pile up and losses mount.

Things go from bad to worse when the banker calls to say the line of credit needs a new home. So, now in the middle of an internal crisis, the company needs to shop for a line of credit.

We’ve actually heard close variations on that story four times in the last month:

• 2 for 1: A service-based company had a big customer experiencing high growth despite lacking operational planning and execution. Significant time and resources were consumed trying to accommodate the customer’s needs—all at the expense of their next largest customer. The result was catastrophic: Both customers became unhappy and left at the same time.
• Say what? A parts supplier’s largest customer’s procurement department did not communicate with its own manufacturing floor about plans to change parts suppliers. As a result, the supplier was caught off-guard by the unexpected and abrupt drop in demand, which cut annual revenues in half.
• American idle: A manufacturing company’s largest customer placed a purchase order with a planned manufacturing start date. The customer then proceeded to push out the start date several times over several months, which resulted in significant idle shop time and operating losses.
• Masquerade fall: A distributor’s largest customer requested 90-day payment terms—a request that was granted, given the customer’s important standing. Later, the distributor discovered that the payment terms masked a cash-flow problem for the customer that eventually resulted in a significant write off.

Manage your risk

Despite the obvious dangers of taking an 800-lb. gorilla’s hand, there are strategies for managing the risks:

1. Don’t allow gorillas in the first place. Set a concentration limit for the business and stick with it. It’s not necessarily a bad thing to tell a customer that you’ve made the responsible decision to limit the amount of business you do with any one customer. It will protect their business as much as it will protect yours.  If a customer rises above your internal concentration threshold, set a plan to reduce the concentration over time by diversifying sales, increasing pricing and self-limiting sales.
2. Don’t let your sales team put their feet up. Keep pursuing new business and continue to foster existing relationships.
3. Do your credit homework. Make sure your biggest customer has the wherewithal to pay bills, particularly when sales terms are extended. Those extended terms may mask a cash-flow problem.
4. Make it your business to know your biggest customer’s business. Communicate regularly. Understand their goals and challenges. Track what’s happening in their industry. Learn about their biggest customers. Examine the steps they are taking to grow and evolve. Reduce the risk of getting a surprise phone call announcing a change that has been months in the making.

Cathy Sedacca is director of sales and marketing for Sage Business Credit. She partnered with Karen Turnquist to found Sage because she believed they could do what had been done by others, but better. Working closely with clients who share the same vision for their own business is the best part of her job.