Financial Planning16 October 20265 min read

Customer Concentration: How Many Customers Is Too Few?

A share of sales alone cannot tell you whether you are exposed. How to work it out over the right window, and the test that answers the real question.

The question behind the percentage

Most owners with one large customer know roughly what share of the business that customer is, and very few have worked it out properly. It matters, because a bank will ask and a buyer will ask first.

The honest answer is not a percentage at all. Two businesses can each have a customer worth 25% of their sales and carry completely different risk: one has light overheads and would replace them inside a year, the other would be posting losses by the end of the quarter. So work the percentage out properly, then run the test that turns it into something you can act on.

Getting the percentage right

Pick a window, and say what it is. Measured across everything you have ever invoiced, a concentration figure is almost always lower than the same figure measured across the last twelve months, because years of old work dilute anything recent. A customer who has been 40% of your sales for the past year can look like 20% of your sales since the business started, and only one of those describes the risk you carry today. Twelve months to your last month end is what a lender means by the question.

Measure sales, not debt. The fast way to do this in a spreadsheet is to sort the aged debtors report by size and take the top few names. That answers a different question, which is who owes you money right now, and your largest customer might settle every invoice on time and barely appear. Use every sales invoice raised in the window, paid or unpaid, and total any undated rows separately, since those cannot be placed in a window at all.

Your ledger includes VAT, your revenue does not

If your business is VAT registered, the figures on your sales ledger include VAT and the revenue line in your profit and loss excludes it. At the standard 20% rate, a ledger showing £720,000 of invoiced sales corresponds to £600,000 of revenue.

The percentage survives this, because numerator and denominator both come from the ledger, so a 25% share really is a 25% share. The pound figures do not: never apply a concentration percentage to a revenue figure, and never divide an invoiced total by twelve to get a monthly one.

The test that actually answers it

Turn the share into what actually matters: what happens to profit and to cash if that customer leaves. Take an illustrative business, Northbank Fabrication. It is not a real company and every figure below is invented for the example.

Twelve months of invoiced sales: £720,000 including VAT, across 14 customers
Largest customer: £180,000 including VAT, so 25% of the ledger
Revenue for the year, excluding VAT: £600,000, which is £50,000 a month
Gross margin 30%, so £15,000 a month of gross profit
Overheads £15,000 a month, so the business sits exactly at break-even

Lose that customer and revenue falls by £12,500 a month. At a 30% margin that removes £3,750 a month of gross profit, so a business at break-even becomes one losing £3,750 a month. Two figures fall out of that, and they are the ones worth carrying around.

Replacing them is a sales target, not a cost exercise. Getting back to break-even means winning £12,500 a month of new revenue, or £150,000 a year. That is a different conversation from cancelling a few subscriptions.

Your cash buys the time to do it. If Northbank holds £40,000 in the bank, losing £3,750 a month absorbs it in a little under eleven months. Our cash runway calculator and break-even calculator run both halves of this on your own figures.

So the question has no numeric answer. Too few is when the largest customer leaving would cost more profit than your cash can absorb before you could realistically replace them.

What to do once you know

Do not start by firing your biggest customer. Concentration is a risk, not a mistake. The work is making the business survivable without them, not shrinking it.

Build the second tier deliberately. A concentrated book is usually one very large customer, two or three medium ones and a long tail. Moving two of the medium ones up is more realistic than finding another giant. Check the tail is real while you are there: three subsidiaries of one group, or three clients from one referrer, are one risk wearing three names.

Get the notice period in writing. If that customer can leave on a month's notice, eleven months of cash cover is really a month of warning followed by eleven months of cash. A longer notice period is often easier to negotiate than a higher price.

How CFO Pal reports it

The management accounts pack carries a customer concentration section over the trailing twelve months: the largest customers with each one's share, the top five together, and how many were invoiced at all. Every pound column is headed as invoiced sales including VAT, and the caption states the window covered, whether your ledger reaches back a full year, and the total of any undated invoices, which are excluded rather than guessed at.

It also watches your larger customers month to month and says when one goes quiet: the last three complete months down more than 30% on the three before. A customer rarely disappears overnight, and that is usually where the warning shows up first. When the whole ledger is down by that much it names nobody, because that is a business-wide problem rather than a customer one.