In August, like many people of my age, I read, with some sadness, about the death of Gerd Müller, the legendary German striker. I always have that image of him hooking the ball past Peter Bonetti to knock us out of the 1970 World Cup quarter final. Müller was a prolific goal scorer and his demise reminded me why I had named one of my KPI’s after him – The Müller Index.
Broadly, when I am reviewing a set of financial statements, I look to check how many of my client’s sales are directed to the leading customer, calling the percentage established The Müller Index.
As with all statistics generated, it is the interpretation of them which is important. My concern is if my client’s business is becoming or is too dependent on one particular customer.
Could you survive losing a big client?
I then look to challenge the client as to what they would do if they were to lose this customer. Would it be terminal for the business or could the business still function and generate the profit? The acid test is to assume that the customer is lost then see what the revised profit and loss account might look like. If the analysis reveals that the loss of the customer could be terminal or leave the business seriously weakened, then action is needed to reduce this risk.
That might just seem common sense but it is not always easy to take preventative measures. The customer might be demanding and all energies are directed towards satisfying that demand. It might be high margin work as well. Sometimes the old dictum “make hay while the sun shines” holds sway.
Having established what proportion the turnover with main customer is as a percentage of total sales, one should probably establish what the safety margin is for the business. For example, the business may have sufficient spread of customers that they are comfortable as long as one customer does not exceed 10% of total turnover. The loss of this departing customer might not seriously damage the business and the turnover can be made up.
I often look at the top four or five customers to see what percentage of the business they generate in aggregate compared with the total.
If one is looking to groom the business for sale, there is no doubt that a prospective buyer is more reassured to see a wide spread of customers with no one customer exercising a dominant position where they might well be influencing operational decisions because of their size and influence.
As I say, each business must decide on what level they are comfortable with in terms of the work undertaken for the leading customer. This will vary in terms of the particular sector the business is operating in. There may well be some data providing an industry standard.
Prevention is better than cure. However well the business is going, the business owner should, in my view, always be seeking to generate more good quality business to reduce the risk of losing the main customer.
Bayern Munich were not even in the Bundesliga when Gerd Müller signed for them. They were not even the leading football club in Munich. They did have other great players coming through such as Beckenbauer but he acknowledged that their rise to the pinnacle of German football owed a considerable debt to Müller’s goals. Would their ascent would have been quite so rapid without him?
That is why I have named my KPI The Müller Index.
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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.