As a small business owner, you’re most likely aware of a few key factors that account for your business value. From your projected cash flow and assets to your overall industry outlook, there are many considerations that can come into play. One aspect of your business value that often gets overlooked, however, is that of customer diversity. By understanding how the makeup of your customer base can directly affect your projected value and knowing how to assess your customer diversity, you’ll be in a better position to achieve long-term success and prepare for handing off or selling a valuable asset down the road.
Understanding the Risks of Customer Concentration
Customer concentration, or having a large portion of your business revenue reliant on a small handful of customers, is one of the biggest risks businesses take when it comes to projected value. Simply put, this is a classic case of “putting too many eggs in one basket.” When a large portion of your revenue is comprised of just a few customers, you run a serious risk of encountering a cash flow issue should one or more of your customers choose to take their business elsewhere.
How Customer Diversity Adds to Your Business Value
On the other hand, having a more diverse customer base can yield the opposite effect for your business. In fact, Divestopedia advises that customer diversity can have a major impact on your company’s value. That’s because when you have a more diverse customer base, you are less likely to encounter cash flow issues and can afford to “bounce back” in the event that you lose a few customers here and there.
Steps to Evaluating Your Customer Diversity
With a better understanding of the importance of customer diversity as it relates to your business value, now is a good time to evaluate your own business for customer concentration issues. Ideally, you’ll want to make sure that no more than 10 percent of your projected revenue comes from any one customer or client. Furthermore, it is important to know your customer base inside and out. This means breaking down your revenue annually to determine a gross-revenue per-customer; this will help you get a better idea of where your revenue is coming from and will help you identify potential concentration risks before they become severe.
Maintaining a detailed customer database with information on industry sectors, geographical areas served, and similar details will also help you get a better idea of your overall diversity. This serves the added benefit of helping you estimate potential earnings and revenues in the future.
There’s no denying that the makeup of your customer base can be just as important as your cash flow, scalability, recurring revenue, and just about any other influencing factor on your business value. The more you can diversify your customer base, the more peace of mind you can enjoy as a small business owner.