Concentrations kill companies

Posted by Laddie Blaskowski on Mar 21, 2007

Have you ever noticed how many small businesses simply drop off the face of the earth? One day they’re open and successful, and the next day they’re gone. Every year a silent killer takes out thousands of businesses. This silent killer is called a “concentration.”

What Is a Concentration?

A good description of a concentration is any major component of your business that is sold to or provided by one person, company, or vendor. For example, if you sell 50% of your product to one company or to a specific industry, it’s a concentration.

The bottom line is that concentrations create a threat that one party or group could disrupt your entire business. They essentially take away your control and can put your business at the mercy of others.

The most common type of concentration is having one or two large customers that you rely on for a high percentage of your sales. If a large percentage of your sales are concentrated with one customer, then your business could fail if that customer went away.

A similar problem can exist with a concentration in just one industry. The owner of a company I was recently referred to told me that his company was in trouble because he had lost four large customers, but he assured me that he didn’t have any concentrations. But when I looked closer, it turned out that all four of those customers were in the same industry, which had recently experienced a downturn.

Other types of concentrations are just as dangerous. During a conversation with another new client, we discussed his company’s sales. This man was very proud of one of his sales staff and boasted that almost 80% of sales came from that one individual…meaning he had a salesperson concentration. If that salesperson were hired away by a competitor, or suffered a serious illness or family disaster, my new client’s business could have been sunk. So we immediately began taking steps to correct the situation.

Concentrations to look for in your own business:

• Having a high percentage of sales with one or two customers.

• Purchasing all or most of a certain product from one vendor, who couldn’t be replaced in a timely manner if that company were to fail.

• Having equipment or software that is very specific and that only one vendor can service, such as a piece of old machinery that is very critical to your business.

• Having an employee who knows a critical part of the business that no one else knows )how to run a machine, certain information about customers, how the accounting system works, etc.), or who is the only person certified in an area critical to the company.

• Having most or all of your sales generated for one effort (trade shows, direct mail, etc.).

• Having most or all of your sales derived from one salesperson.

These risks can sneak up you and often grow worse over time.

Some concentrations are unavoidable, such as having all of your utilities under the control of your local municipality. But most concentrations should be looked at as a liability and, wherever possible, the risk should be lessened. You should strive to diversify your customer base and have back-up vendors lined up for essential supplies.

Take a good look at your business to determine if any concentrations exist, figure out a plan for minimizing the risk, and determine what-if scenarios or contingency plans if something should go wrong.