How many times have all of us heard that over the years? Probably dozens.
How many times does that question apply to our businesses? Probably dozens.
We concentrate on product quality. We concentrate on customer service and customer retention. We concentrate on profitability. We concentrate on competition. We concentrate on marketing. We concentrate on networking.
How often do we concentrate on the customers that make-up of our accounts receivable? Way too often not enough. Here’s why.
As businesses grow, so do the need for credit sales – accounts receivable. Many times the growth speed is faster than the keeping up with growth speed.
Somewhere along the line, many businesses decide that they should chase bigger customers. Bigger customers buy more stuff, create more revenue easier than many small customers and in general seem like a good thing to focus on.
Maybe so, maybe not.
Here are two examples of businesses I’ve actually known that went the bigger is better route.
One business sold printing. They had a very diverse customer base. That base could be easily serviced with ink that was easy to buy. So far so good. The business owner worked very hard to build up a relationship with a very large customer. And he succeeded. Still so far so good. Over time, the new large customer grew its volume with our printer.
The larger volume meant the owner had to spend more time on the new business and he began to not have time for the older, smaller businesses.
Guess what happened. The new big customer started to demand specialty inks in colors to go better with their products. Our printer sourced them and bought them. Pretty soon our printer had a huge stock of specialty inks and very little of the old colors. Then the shoe dropped.
The new big customer found a cheaper printer and stopped buying from our guy.
Here was the outcome. Our printer had an inventory of ink he couldn’t sell and since he’d lost most of his smaller customers didn’t have enough business to continue. He went out of business.
The second business represented and sold a line of very high quality camping gear. Like the printer he worked long and hard to develop a relationship with a major national retailer.
For a couple of years everything went well. The retailer bought more and more product and our business made more and more money. Over that time the retailer became about 90% of our guy’s volume.
Guess what happened. One day our guy walked into the buyer’s office at the retailer. The buyer looked at him and said they were no longer allowed to talk with each other. Our owner asked why and was told that his line was now a “house account”. (If that’s not a familiar term it means the retailer was now buying directly from the manufacturer with no middle man – our business.)
This business never stocked inventory so it wasn’t left with unsaleable products. However the business had ignored its smaller customers and lost them.
Here was the outcome. Our camping gear guy lasted about a year. He filed bankruptcy and was out of business.
Both of these examples illustrate what are called concentrations. You should concentrate carefully on these concentrations because while they may seem good on the front end, they may not end up so well on the back end.
Check you accounts receivable regularly and start to ask questions if a particular customer starts to represent 10% or more of your total credit sale volume.