Does your business have a concentrated financial risk that may be looming?
Listen in to this weeks episode to learn more about concentrated risk and how you can mitigate it today!
Concentrated Risk is when you could have a huge vulnerability in your business because the bulk of your revenue is coming from just a couple of sources.
I have fallen victim to a concentrated revenue risk in the past which is why I wanted to share this topic with you today.
The great news is that this situation is easily avoidable if you know what to look for!
The 80/20 Rule
We’ve all heard of this rule: 80% of your revenue comes from 20% of your business. This is pretty true across most businesses.
Here’s what happens when your business is really heavily skewed to one side of revenue.
Let’s say that 80% of your sales are coming from two big clients who have you on retainer, and you don’t have very many new clients (or new blood as I like to say) coming in.
This opens your business up to the risk that you won’t be able to cover that revenue discrepancy if/when those retainers end.
To put it differently, let’s say your retainer with those clients is for ninety days. When you look to renew the retainer your client’s financial situation changes or you are no longer needed on the project. Suddenly that big chunk of revenue vanishes when your retainer isn’t renewed.
This leaves you with a huge chunk of your revenue (40% in this example) that you now need to make up with some other source. This is a problem if you haven’t prepared your business! This is why it is so important to continually keep your funnel full revenue sources.
The second indicator of concentrated risk that I have see, is getting your leads from only one source.
If most of your paying customers are coming from the same referral source or tied to one platform/company, you could quickly find your business in trouble if changes happen on that platform or how that companies deals with people.
Mitigate Your Risk
No that you know what concentrated risk is, it is time to know how to mitigate it.
You can mitigate your risk by doing the work to discover f your business has a concentrated revenue risk and where it is coming from.
Another way to mitigate the risk is to keep new blood coming in, stagger payments or retainers, and consider diversifying your referral sources.
This will help you stay on track when your circumstances, clients, or the markets change.
Concentrated revenue risks happen to the best of us, but they don’t have to! This situation can be easily avoided if you know what to look for.
Do the work now to determine if your business is in danger of a concentrated revenue risk, then, take the necessary steps to mitigate this risk going forward.
As always: Keep it simple, so you can grow.