It’s a Jungle Out There

Finding clients, keeping them, and ensuring your firm has a good balance or diversity of clients. This is a topic that truly requires constant attention.

Banks will often analyze a business’s clients. If a client has a large percentage of the sales, usually around twenty (20) percent or more, this is often perceived as a high credit risk. It is called concentration of revenue and it is not favored by most commercial bank underwriters.

It may seem contrary to what a busienss owner believes. A large client means much less administrative action than many or multiple clients. A single monthly invoice, a single check to deposit, a single person to entertain, etc.

At a certain concentration percentage, your CPA will need to disclose the client in your annual financial statements if you prepare anything other than a Tax Return. And many banks may strip that client and its account receivable out of your asset base used for collateral to determine how much of a loan you may borrow. It truly is a case where bigger may likely not be better, at least from a credit perspective.

So, that leaves you juggling more clients, more administrative action, and seeking more clients in a jungle of competition. Do not turn down that next big client but just be aware of how its revenue may cause a concentration. Know the risks of losing such a large client and seek to balance their impact if you were to lose them. If you prefer less clients with larger revenue concentration, try to ensure their impact is less than twenty (20) percent of your total annual sales. Perhaps focus on landing a few larger clients instead of just a single client.

It may be a jungle out there when it comes to finding and landing clients, but it will benefit you in the long run financially to have more diversification among your client base, certainly, the banks will appreciate it!

Be well.