The Muller Index Revisited

Paul Short Accountant EssexPosted by Paul Short:

An article in the Business Press recently about the plight of Imagination, a company designing microchips and based in Hertfordshire, caught my attention.  Imagination is quoted and has some 1,300 staff, so it is a big business.

It seems that Apple was Imagination’s biggest customer and Apple’s decision to design its own graphics microchips in house caused Imagination’s share price to collapse by 70%.  Subsequently there were predators lining up for a takeover.  Rivals will soon smell blood in the water.

It reminded me that the Muller Index is relevant for both large and small businesses alike.  The Muller Index was devised to test the vulnerability of Lambert Chapman clients to the loss of their largest customer.

The Muller Index is one of a number of matrices we use to stress test the financial wellbeing of our clients at the year end.  I think it is an important, but sometimes neglected test.

The measure is simple to apply.  It is the percentage of sales generated by the main customer to total sales in the year.

Having quantified this, the question is whether the company could survive the loss of the major customer.

We would ask what the impact would be on the Profit & Loss account?  Would the loss be terminal to the business?  If it is, then there needs to be plans in place to deal with this clear and present danger to the business and its future.  Sometimes we look at the top two, three or five customers to get the wider assessment of the vulnerability of the business.

Assessing the impact of the loss of the leading customer on the business is always straightforward.  It may not be a higher margin customer.  Its loss could enable a substantial reduction in variable, discretionary and possibly fixed costs.  An important step would be to work through the numbers.

If we are concerned that the Muller Index score is too high, we would press the client on the strategies in place, should the worst happen.

One element of the process is of course to establish what is an acceptable Muller Index score.  For me, I operate on 5%.  Ideally I do not want one client generating more than 5% of my fees.  Others may set the bar higher or lower.  It would also depend on the nature of the sector.  Some businesses have a high population of potential customers to penetrate.  Some have very few potential customers.  The important thing is to set the level and then monitor it.

In some cases the business will be dominated by the demands and needs of the main customer and everything else is subsumed to this overriding interest to the effect that other customers have to be neglected and it is not practical to seek new business.  The mantra may well be to make hay while the sun shines, but there needs to be a plan B if it starts to rain.

What is your Muller Index score?

I like to discuss with clients the strategies to reduce their Muller Index score and make the business more secure.

One more thought.  If someone is looking to sell their business, the buyer will pay more if there is a spread of customers and no undue exposure to the whims of one single customer.

If you need any assistance in this area, please get in touch.

November 2017

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.

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