The three things Graham Potts wishes he had known before starting a business are easy to say and easy to ignore: sales and marketing are not optional, relying on one customer is a risk, and a change in government policy can cut your work overnight. Each one cost him before he learned it.
Watch Graham talk this through: see the video on LinkedIn
1. Sales and marketing are not optional
Graham admits that when he started, he did not understand sales and marketing or how much work goes into winning a customer. It is a common gap. Many people start a business because they are good at the work itself, and assume good work will bring customers in on its own.
It rarely does. No matter how good your product or service is, nobody buys it if they don’t know about it. Being visible, asking for work and following up enquiries is part of running the business, not something to fit in when you are quiet.
The trap is that sales and marketing get dropped as soon as you are busy. The work you win this month keeps you going for the next few months, so when the busy spell ends, nothing is lined up behind it. A small amount of time every week does more than a burst of effort when the diary is empty.
- Set aside time for sales and marketing every week, not only when work dries up
- Know where your customers come from and what each source brings in
- Follow up on every enquiry and quote, and keep a note of why you won or lost the work
- Ask happy customers for Google reviews and referrals
- Build the cost of winning work into your prices. Our post on contractor rate vs salary shows how to work out a rate that does this
2. Do not rely on one customer
The second lesson is about relying on too few customers. In most businesses, around 80% of the work comes from 20% of the customers. That is normal. The danger is when that 20% is one customer.
Graham’s advice is that it is fine to have three, four or five big customers, but not to depend on one. If that one customer leaves, renegotiates or pays late, the whole business feels it. Try to even out your income as much as you can.
A large customer also has more influence over your prices and payment terms. If they know they make up most of your turnover, they know you cannot easily walk away. Spreading your income gives you room to say no.
Some signs that you depend too much on one customer:
- You would struggle to pay your fixed costs for more than a month or two without them
- You accept price cuts or longer payment terms because you feel you cannot refuse
- Your staff spend most of their week on that one customer’s work
- You have stopped looking for new customers because that one keeps you busy
How to check your own customer mix
- List your turnover by customer for the last 12 months. Your accounting software can usually produce this as a sales by customer report.
- Work out what share of turnover your biggest customer makes up, and then your top five.
- Ask what would happen if the biggest one stopped buying tomorrow. Could you still cover your fixed costs and wages?
- Set a limit you are comfortable with for any one customer, and plan how to win work that brings the biggest one back under it.
There is no single right number, but if one customer is well over a quarter of your turnover, it is worth a plan. Our guide to managing customer dependency covers how.
3. Government policy can halve your workload
The biggest risk Graham has faced in his own businesses is a change in government policy. More than once, a policy change has cut the work in a business he owned by half, with little warning.
If a large share of your work depends on grants, subsidies or government-funded schemes, treat it as a risk to manage rather than steady income. Build other sources of work alongside it, ideally some recurring income, keep an eye on policy announcements that affect your sector, and know what you would cut if that work stopped.
The same applies to changes in regulation and tax. Changes to how a scheme is funded, who qualifies, or how a service must be delivered can quickly shift demand. Keep in touch with your trade body and read the Budget announcements that apply to your sector, so changes don’t arrive as a surprise. The government’s Business Support Helpline can also point you to free advice.
A simple exercise helps. Take your cash flow forecast and ask what happens if government-funded work falls by half from next month. How many months could you keep going? Which costs would you cut first? Knowing the answers in advance means you can act in days rather than weeks if it happens.
What the three lessons have in common
All three come down to where your income comes from and how secure it is. A business with a steady flow of new enquiries, a spread of customers and more than one type of work can absorb a shock that would sink one with none of those things.
A regular look at your figures shows where you stand: which customers make up most of your turnover, how much depends on one source, and how long you could keep going if it stopped. A cash flow forecast is the place to start. Build in a cash reserve too, so a lost customer or a policy change gives you time to respond rather than forcing a quick decision. Our 5 ways to protect your business in a recession covers other ways to prepare.
If you are borrowing to get started, check what you are signing. Many business loans and supplier accounts include a personal guarantee, which can put your own money at risk if the business struggles.
Glossary
Turnover: The total value of your sales before any costs are taken off.
80/20 rule: The pattern where around 80% of your sales come from about 20% of your customers.
Customer dependency: When one customer, or a small number, makes up so much of your turnover that losing them would put the business at risk.
Fixed costs: Costs that stay the same no matter how much you sell, such as rent, insurance, and salaries.
Cash flow forecast: A month-by-month estimate of the money you expect to come in and go out so that you can spot shortfalls in advance.
Cash reserve: Money set aside to cover costs if income drops suddenly.
Recurring income: Income that comes in regularly, such as monthly contracts or subscriptions, rather than one-off jobs.
Related reading
- Contractor Rate vs Salary: Why £50,000 Isn’t £50,000
- Personal Guarantees: What Every Director Should Know
- When a Competitor Opens Next Door: How to Respond
- What to Do When You Depend on One or Two Key Customers
- Cash Flow Forecast Guide
Starting out or want a second opinion?
The government’s guide to setting up a business covers the legal first steps. If you are starting a business, or want to know where yours is exposed, book a free chat with the team.