A. Sarah Lafferty answers:
This sounds like a classic case of having a single client that accounts for too large a percentage of overall revenue, which creates a major risk factor for a professional services firm. (The burglary is almost irrelevant, unless of course there was no insurance to cover the stolen property.)
Realistically, many firms are in this situation, but there are some measures that companies can take to mitigate the risk. The key is to plan for the client termination from the outset, even if it seems counter-intuitive.
Firstly, when you take on a large client, you should always build in a termination clause that gives reasonable time to replace the revenue. To make this more palatable, the firm can start with a probationary period so that the client does not feel locked in from the outset.
Secondly, knowing the average client duration for your industry, you must plan the inevitable termination date into your cash forecast and work to replace the revenue before the client gives notice. Client relationships end for a range of reasons beyond the immediate control of the firm, so it’s good business practice to assume it will happen. If the relationship doesn’t end as planned, then consider the extra revenue a windfall.
Thirdly, if you’re finding it difficult to get out of the position of having one client dominating your portfolio, you need to build up enough cash reserves so that you can survive for at least three months after the client gives notice. You also need to factor in the unfortunate possibility of having to terminate staff and the costs associated with having to do this. A good accountant can and should be helping you calculate the optimal cash reserve to protect your business.
Finally, if you need specialist resources to service a large client that is dominating your portfolio, I strongly recommend using freelance or contract help to keep spare capacity to the absolute minimum. Then, if the client exits, your liabilities will be considerably lower and you will have hopefully saved more cash.
Sarah Lafferty is the co-founder and director of Round Earth Consulting, which enables high growth companies in the technology sector to communicate directly with their markets.
www.roundearthconsulting.com