Hi there, it’s Brad Turville here from BJT Financial. So we’ve been off the radar for a couple of weeks now. I’ll be honest, we had a little hiccup with our website which meant we couldn’t blog, we couldn’t post articles, we couldn’t even access the website and log in to the WordPress backend and what that also meant was that we couldn’t podcast.
Now, the reason this happened was I was using a web developer overseas and I had been doing it let’s say on the cheap and it came back and came back to bite me. And so I know some premium developers that do a great job over at superfastbusiness.com and I was happy to lash out and get them on the job to fix things up.
So, that was a great case for me to really understand something called ‘pay now’ or ‘pay later.’ And what that means is well sometimes, if you don’t pay the premium now ok, (so you take the cheaper avenue) you sometimes end up paying even more down the line just to get it fixed up or get you back on track and that’s what happened to me.
I’d been taking a bit of the cheaper option and the whole website crashed so then I had to go back and pay a more premium team to fix the problem and if I had have just got them to do it from the start, then it would have been done right, it would have saved me money in the long run and we wouldn’t be facing this problem. So that was the lesson that I took from that.
How To Not Sink Your Small Business
What I wanted to share with you today was something about ‘How Not to Sink Your Small Business’. So, have seen a few businesses recently that have come in, we’ve had a little bit of a look ‘under the hood’ and seeing what’s going on in there, and a handful of them have been in a situation where they’re very much reliant on only a few clients.
So a smaller amount of clients make up a large portion of their revenue. So if any one client makes up more than 20% of your revenue, then things are starting to get a little bit risky. Risky as in if they leave you – and that could be for any reason – they might outgrow you, you might outgrow them, the person you report to might leave or they might have a new management structure, they may no longer want your product or service.
Someone might come in that’s a savvier business, that’s more innovative, that’s got better sales people, better marketing, they might price cut you, whatever the case may be, if you lose a client and let’s say they make up 30% of your revenue, well, that’s going to hurt, that’s a big dent in your revenue and you’re still going to have teams to pay, rent to pay, you’re still going to put food on your own table.
So, what I want you to do is have a look at your business. Now, as business owners, you’re going to know the type of clients you have and you’re going to know if there’s a few clients in there that make up a large portion of your revenue. When I first started my accounting firm, I did have a large client that I did a lot of work for every month and they were greater than 20% of my revenue. And so my goal from there was the next, let’s say influx of clients I bring on, are going to be not in that type of position. They’ve got to be a little bit smaller, still within the type of people I want to work with, but not very big clients.
Because if I have just taken on a couple of very big clients, then I would be deemed to be in quite a risky situation because if one fell off, or two, it could be anything outside of your control and nothing to do with you and how good of a job you do; they decide to leave or they go bankrupt, they go into liquidation; whatever the case may be, you’re now left high and dry and that could sink your business overnight. You have teams to pay, creditors to pay, the ATO to pay. Bang, you’ve got no cash, you’ve got no client; you’re gone!
So have a look at your business and if there’s clients in there that are very big, we want to try and reduce the percentage of revenue that they make up. This represents a risk to you and your business so, what does that really mean? Well, when you’re looking at a business from a valuation perspective, from a, “I’d like to sell this business in 5 years, in 10 years” perspective, or if you’re trying to raise capital to build the business or bring some investors on board to build the business, you’ll have to go through a business valuation. And part of the business valuation is a theory and a framework called:
The Porter’s Five Forces
The Porter’s Five Forces is basically a framework that you can work through, that we work through and when we’re analysing a business. And one of them in particular we’re talking about here is called the ‘Bargaining Power of Customers.’ So when analyzing a business, we want to look at the business, we want to see, “How much bargaining power do the customers have over this business?” So what does that mean to you?
That means if you’ve got a handful of clients that make up a large amount of your revenue, there’s a good chance that they’re going to know that. They know they’ve got you ham strung. So that can tell you what to do, when to do it. They can tell you how much they’re going to pay you. They’re going to tell you when you’re going to come and work for them and when you’re going to leave. So it’s almost like you’ve got a job again. You’ve given up all the things that you love about having a small business.
I believe a small business should reward you richly in time and money. That’s what I believe in. But if you’re working with some big clients and they’re dictating the time and the money, well that’s sort of going against everything that you believe in. So by accepting and looking at the fact that, “I’m in the position I’m in and I have got maybe some clients like this, what can I do?” Well, don’t fire them because they are producing a lot of revenue. But as you’re marketing your business, let’s try and reduce the risk of their Bargaining Power down.
I’ll give you an example
Let’s say you turn over $500,000 per year. In the overall scheme of things you’re a relatively small business and the great thing about that position is if you’re turning over less than a million dollars, you need to do more sales, more marketing and be more scalable. You’re turning over $500,000 and let’s say your average client is $5,000. That means you’d have a 100 clients paying you $5,000 and that’s your $500,000.
Now, if you have a couple of clients leave because naturally some will leave, you might make a few changes in the business and that might not work for them anymore, let’s say 5% of them leave, even let’s say 10%. So 10% of those clients leave, that represents 10 clients out of a hundred, and what that’s going to do for your business? Well, it’s going to drop your business from a hundred clients down to 90 clients. Not exactly going to flatten your business, right? But if you’re reliant on let’s say only 5 clients, let’s call it 10 clients. Let’s say you’ve got 10 clients paying you $50,000 a year, 10x$50,000 is your $500,000. So still you’re making the same revenue but now instead of a hundred clients, you’re only got 10 clients. Well, if two of those clients leave, you’ve now taken a $100,000 drop in revenue. That’s if only 2%, or two leave.
If we use the last example where a good chunk of them leave, let’s say half of them leave, that’s hard for your revenue. That’s going to hurt and that’ll probably sink your business. So what’s the Bargaining Power of Your Clients? By having a business that isn’t reliant on the big, whale clients that bring in a lot of the revenue, you are de-risking the business. It’s going to make it more comfortable for you and going forward, it’s going to be a more saleable business and you’re not going to have the risks of it that one of these big guys may leave one day.
Have a look at your business and start putting things in place to de-risk to get rid of the really big clients and to bring on some more of your perfect type of clients.
So we are only about a month away from Christmas. We’re at the end of 2015 now so I’m going to be releasing some more Christmas time end-of-year related articles and podcast, because at a lot of businesses its very seasonal; tourism and retail and hospitality businesses start to boom so there’s a lot of work; they have to buy a lot of products, more opening hours but also need more staff, also their December activities statement is going to be a lot bigger, and then for other businesses like us accountants and lawyers and finance brokers and real estate agents well, it’s just usually a bit of a quiet time.
So some of your team will go and then on annual leave, you’ll have skeleton staff on, cashflow is really going to go down. So you don’t want to really go out and go nuts and spend a whole lot of cashflow because there’s not exactly truckloads of it coming in. So I’m going to have a little bit of content like that coming in because I think it’s good to know now that we’re coming to that time of year.
If you also haven’t seen our checklist on the ‘11 Ways Your Accountant Should Be Working With You,’ just scroll up and put your email in the optin box at the very top of the page to get your copy. It will give you the 11 ways that we work with our clients and that we believe every accountant should be working with their clients. So download the checklist, you can run your accountants through it, make sure they stack up.