Learn how to avoid the pitfalls of being over-dependent in business

Learn how to avoid the pitfalls of being over-dependent in business
Richard White
Richard WhiteRJW Consulting Ltd

Posted: Tue 24th Aug 2021

As pandemic restrictions come to an end and financial forecasts suggest a strong economic recovery, it’s vital that businesses take the time to reset and have an honest look at themselves.

Now’s the time to take steps to embed the systems and processes you need to deliver growth in the value of your business.

A key driver here is the level of dependency within your business. This topic often gets us thinking about the customer, but it’s equally important to consider your suppliers, the markets in which you operate and your employees.

Being over-dependent on customers

So what does over-dependency mean in business? Let’s start with customers. As a rough guide, no single customer should comprise more than 25% of your turnover or profit.

As a small business, this may be difficult to achieve in the short term but it needs to be on your radar. Any number of factors completely outside of your control (a change in personnel at the customer, a shift in their market, a pandemic) could have a serious and potentially fatal impact on your business.

You will instinctively know who your largest customers are, but printing out a customer spend report for the last 24 months will give you an accurate starting point.

Analyse the report by asking yourself these questions:

  • What has changed in the last couple of years?

  • Which customers are growing and likely to move beyond 25% of total spend?

  • Why are they growing?

  • What is happening in their business and their market?

  • Is there something on the horizon which could necessitate them changing supplier, leaving you vulnerable?

  • How can you mitigate that risk?

Being over-dependent on suppliers

The same applies to suppliers. An over-reliance on one supplier severely reduces your negotiating power and leaves you susceptible to factors outside of your control.

Ask yourself these questions about your suppliers:

  • What is your contingency if your primary supplier surprises you – landing you with a hefty price rise or stopping your supply, for example?

  • Have you got a Plan B?

  • How quickly can you find a replacement supplier?

  • Is it worth paying two suppliers a slightly higher price to remove the risk of loss?

Being over-dependent on markets

This is an area that is easily overlooked, but being aware of the following factors will broaden your opportunities for growth:

  • What impact would a change in the markets in which you operate have?

  • What are the trends in your market?

  • What are the political, economic, social and technological factors that might have a positive or negative impact on your sector and therefore your business?

  • Is your market growing or declining and is it time to change or consolidate?

Being over-dependent on employees

Last but by no means least, your employees are an important consideration. As a small business you’re quite likely to be dependent on a small number of valuable team members and in an increasingly competitive market, retaining your people is essential.

This is about much more than just pay – your employees have a wide range of needs to feel fulfilled in their workplace:

  • Can you tie key people into a long term incentive plan?

  • What about other benefits such as healthcare and holidays?

  • How can you help staff develop personally and professionally?

  • How can you accommodate flexible working?

How to build a resilient business

In his book Good to Great, Jim Collins developed a concept called Productive Paranoia. The idea is that only mistakes you can learn from are the ones you survive and it’s the leaders who assume conditions can unexpectedly and quickly change that stave off decline and thrive.

These leaders obsessively ask “what if?”. And, by preparing ahead of time, building reserves, preserving a margin of safety, bounding risk, and honing their disciplines in good times and bad, they have the ability to handle disruptions from a position of strength and flexibility.

The 3-question challenge

My challenge and call to action is to ask yourself three questions about each of the areas mentioned above: customers, suppliers, markets and employees:

  1. Are we over-dependent right now and are we going to be in the near future?

  2. How exposed are we to a change in any of these areas?

  3. What is our contingency, our Plan B?

Make it a habit to keep asking yourself these questions and reflect upon the answers to build a business that is less likely to become a victim of over-dependency.

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Richard White
Richard WhiteRJW Consulting Ltd

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