For many UK small business owners, it’s easy to focus on your biggest clients.
They are often the ones driving the bulk of your revenue.
However, relying too heavily on one or a few customers can expose your business to significant risks.
Sales concentration becomes an issue when:
🔹 one client accounts for more than 10-20% of your total fees; or
🔹 your top five clients collectively contribute over 25%.
If you’re unlucky and one of these clients goes out of business owing you money, or reduces their orders, your cash flow and financial stability could be severely impacted.
This could mean struggling to pay suppliers, your staff and you, or fund your business growth initiatives.
Beyond the immediate financial risks, customer concentration can also hurt your company’s value. Potential investors or buyers often see businesses with high customer dependency as risky, which can lead to a valuation discount and lower offers.
So, how can you protect yourself?
🔹 Diversify Your Customer Base: Actively work to attract new clients in different industries or regions to reduce reliance on a few key accounts. You can tolerate lower margins from those new clients in the short term, if they do not make you too busy.
🔹 Secure Long-Term Contracts: Negotiate agreements with existing customers that provide revenue stability and predictability. This protects you against reducing orders, but not if they go out of business.
🔹 Monitor Credit Risk: Regularly assess the financial health of your key customers to avoid surprises, such as unpaid debts if they go out of business. You can use commercial credit scoring companies such as Experian or Dun & Bradstreet. You can follow your clients on Companies House.
🔹 Strengthen Relationships: Build and maintain loyalty with current clients while ensuring you don’t neglect opportunities to grow beyond them. Feel when your main point of contact has itchy feet.
🔹 Keep a Rainy Day Fund: I know this can be difficult. But do try to keep a cash reserve buffer that could see you through a couple of months of costs and expenses. Remember that you could take a double hit: your client owes you money, and you lose their monthly sales.
Customer concentration is a challenge, but it’s not insurmountable. By diversifying your revenue streams and planning ahead, you can safeguard your business’s stability and increase its value.