Are All Your Eggs In One Basket?
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Banking / Finance . One never knows what situations will affect their own business, much less how other stakeholders will be affected. Being too reliant on another party can really hurt your business when that other partner stumbles or falls.
The most obvious concentration risk is with your customers. Many lenders will impose limits on what they will lend to a business that does not have a diversified customer base. That limit may come in the form of reduced advanced rates, limits on eligible collateral or an outright denial of credit. Small businesses may need to rely on one major customer for some time but should be working very hard to diversify.
In the situation where you do not have a diverse customer base, you don’t have the same leverage in working with that customer. Too much concentration opens you up to having to follow the customer’s wishes even when it is counter-productive to your own wishes. It may also make your dependence on that customer even greater.
Diversification is also necessary with vendors and suppliers. They too can have troubles, no matter how strong they may seem. Their problems can really hurt your businesses. Professionals such as attorneys, accountants and even bankers are harder to diversify, but it is always good to at least know where you would turn should your primary professional provider be come unable or unwilling to service your needs. Knowing whom you will turn to in that situation is easier done beforehand and not at the time when the need arises.
Diversification helps you in other ways too. It offers you a broader array of input into your business and a larger group of supporters to help you improve your business. Creating more customers, venders and professional support means you are connected to more places to for you to get ideas and market intelligence, both of which can be very valuable.
Diversification is a sound practice in that it helps minimize your exposure to all the risks out there.
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