I thought I would revisit one of the tests I do when I review a client’s accounts.
I try to look at the threats to a business. What could occur which might imperil the wellbeing of the business? One such danger might be the over-dependence of one customer.
I would therefore compute the proportion of sales which are generated by that main customer. I then look to assess the potential impact on the business. Could the business survive the loss of that customer? Would turnover still be above break-even?
The ratio I have calculated is called the Muller Index Score. In terms of my own business, I work on a Muller Index Score in single figures. I believe that the ICAEW Bellweather Percentage is 15%.
Stress Test the Business
Every business should establish its Muller Index Score and then project their results on the basis that the main customer is lost. Is the business still viable? Could overhead costs be cut to minimise the impact?
In some, albeit rare cases, the loss of a large demanding customer with the power to depress the margin can be liberating. The business can be restructured and can focus on its rank and file customers, its bread and butter, rather than having to focus on the specific demands of the main customer to the detriment of everyone else.
The retail sector might be one area where this can happen. Of course, in some monopolistic or oligopolistic sectors, the business may have little choice if their customer is the only or main customer around. All one can perhaps then do is to make hay whilst the sun shines.
Where the business owner has some control of the situation, then I would suggest that he should try and push down the Muller Index Score by extending the range and quality of the customer base. Again the prudent business owner would invest energy into this process in the good times rather than wait until the main customer is lost or there is a significant downturn in activity – sometimes easier said than done.
One thing is for sure. Securing finance from a lender is easier with a spread of customers and no particular exposure to one party. A business with a healthy spread of customers would always attract a higher price from a buyer than one with all its eggs in the one basket.
Posted by Paul Short
Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.