Big and Bad

More sales can’t fix everything

Recently, a friend was forced to confront the possibility of losing his company’s biggest account. The longstanding relationship with the customer had provided long-term benefits that included both solid revenues and marketplace credibility.

Situations change, though, and the relationship suddenly looked less solid than it had in years past. How would the company survive if the largest customer left? How many people might need to be laid off? Would the company run into compliance issues with its bankers?

Needless to say, the risks seemed huge. And then, my friend ran the numbers. He calculated all the revenues, product costs, servicing costs, carrying costs and other figures related to the big customer.

And…it turns out that profitability would actually increase if the flagship customer left.

It didn’t seem possible, at first, and it certainly wasn’t the answer anyone would expect. After all, a customer providing so much revenue just has to be profitable. Right?

Wrong. Over time, the costs of handholding, inventory management, receivables financing and other expenses destroyed the margins that had made the customer highly desirable at first. As the economy weakened and the customer demanded new concessions, my friend’s company obliged, assuming that the business would continue to offer profit potential.

If he had been asked which customer provided the largest contribution to profitability, my friend would have said it was the largest customer and he would have been sure his answer was correct. Of course, that was before he actually checked it out.

Where does your company make most of its money? Do you really know? Based on my experience with clients, plus conversations with friends in YPO, WPO and EO, I’d guess that fewer than 10% of company owners really know where their profits are generated.

Of course, that’s just my opinion. What do you think?


Written by Michael Rosenbaum on November 8th, 2011. Posted in Uncategorized

Trackback from your site.

Leave a comment