Customer concentration is a huge risk for all size companies, but especially small businesses. Not only does concentration give too much power to the big customer in negotiating, but it usually results in lower margins. In the case where the customer isn’t an “A+” credit, that concentration can be deadly.
Companies sometimes fail to fully understand the impact of having the “customer in the middle” — where the risk lies — because their daily dealings are with the end user of products and services. Their real customer is the one that pays the bills, and that’s where they should focus their efforts to determine creditworthiness. Don’t fall for the financial shell game that the end user is the customer.
Determining creditworthiness is sometimes a complex process, but it’s critical to understand the probability of default when you decide to grant credit terms to a customer. Creditors have got to decide what amount of risk warrants an in-depth look at the risk. When they understand the risk, they can then employ strategies like following up immediately on past dues, billing often, and holding service until the customer is current to minimize potential loss exposures. If the risk is known and margins insufficient to make up for any losses, a company can choose to walk away before a large customer goes belly up.
Know thy customer is the #1 rule when you are deciding whether or not to take on a customer and bill them on credit.
Learn more: Fear of The Money Talk