In business, risks can be overt or sometimes insidious and hard to identify. This is the case for what is often termed concentration risk. When this type of risk become realised, the costs can be very severe, sometimes fatal. This article will outline some of the general actions which should be taken in the event that a key customer or supplier is lost.
It is a fact that many SMEs trade on relationships with just a handful of customers or suppliers. Even worse, there are business which rely on only one customer or supplier.
Take an example of a food manufacturer who has successfully won a contract to supply a major retailer. It is a profitable relationship which has been nurtured for several years. The business has scaled up manufacturing capacity to maximise the benefit, and devoted a vast majority of time to relationship management.
Suddenly, the retailer scales down orders or chooses to source product elsewhere. In reality however, there are countless other reasons why sudden client loss can occur – from debtor insolvency, to shareholder disputes and liquidation, to divorce, management change, acquisitions, and repositioning.
If you find yourself in the unfortunate situation of having lost your biggest customer, the impact of which is a devastating loss to your income and a serious reduction in cash flow, there are things you can do to survive. But you must act fast:
1. Call your client(s) — First and foremost, you need to speak directly with the customer you just lost and find out what happened. Why did they stop doing business with you and your company? You need to know the reasons for losing the customer and assess if it will be affecting other customers. Now is a good time to stay close to your existing customers. Not knowing about any potentially fatal issues will almost certainly exacerbate the problems or make the issue irrecoverable. Seek to gain additional business from new clients and existing client as a priority, and ensure your staff and network know the type of business you are seeking.
2. Review your cashflow — You need to know how much time you have to work with before expenses build up to a point they cannot be supported by cash flow. Pull-out your sales forecasts and review the likelihood and timings of converting new opportunities. Review your cashflow forecasts to identify upcoming expenses. In such cases, a financing tool such as debtor finance, debt recovery or overdraft may be necessary to ensure your business has the required working capital to trade through the issue.
3. Take stock and don’t overreact — This is a time for cool heads. Identify and gain all the information required to work through the problem, and resist the urge to suddenly sell off assets or make staffing decisions. How this situation is managed will be very clear to your staff.
4. Review your investment pipeline and cut back on expenses — List all of your business expenses to identify if there are expenses which can be deferred or reduced. At this point, ensure you don’t reduce costs related to the provision of your product or service, in order to minimise any damage to your existing client base, which are now more important than ever.
5. Speak to your financier – It is best to keep your financier advised of changes in circumstances proactively as this may be the fastest and best way to achieve an outcome which can help your business.
6. Control the message — The loss of a major client can generate discussions or even media coverage, so it is important you are proactive in putting a plan to manage the reputational issues which might arise. This of course could mean not acting at all, but you may need to offset the issue by communicating recent successes or provide a general business update to maintain the confidence of key influencers on your business.
7. Long term planning – Whilst a profitable relationship with a major customer seems promising, it can carry inherent risks. Where possible, you need to continually seek to diversify your client base to safeguard against the shock of losing a major client.