What is customer concentration risk?
The short answer
Customer concentration risk is how much of your sales would go if one customer, or a few, stopped buying. It is measured as the largest customer’s share of net sales and the top five customers’ share together, month by month.
There is no single safe number, but one line is written into the accounting standards: a company reporting under IFRS 8 or US GAAP’s ASC 280 must say when any one customer brings in 10% or more of its revenue.
Measure it with two shares of net sales
The largest customer’s share = that customer’s net sales for the month ÷ net sales to all customers × 100. The top five’s share is the same with the five largest customers added together. Use sales after credit notes, so a customer who returned half an order is not counted at the full invoice.
Take an invented business with net sales of 400,000 in a month, of which its largest customer bought 88,000 and its five largest 236,000 together. The largest customer’s share is 88,000 ÷ 400,000 × 100 = 22%; the top five’s is 236,000 ÷ 400,000 × 100 = 59%. Losing that one customer would take more than a fifth of the month’s sales with it.
Every figure shown here is invented for illustration. Nothing on this page is computed from anyone’s accounts.
Read the trend, not one month
One large order can push a customer’s share up for a month and mean nothing. A share that rises month after month means the business is coming to depend on that customer, and the time to win other customers is before it is a problem. Set this month beside last month and the same month last year, and watch whether new customers are arriving to spread the load.
Who asks about customer concentration
A buyer of the business, a lender and an investor all ask, because a customer who leaves takes their share of the profit with them. The 10% disclosure in the accounting standards exists for the same reason: a reader of the accounts should know when the revenue rests on one customer, even if that customer is not named. The owner should know first.
See your own customer concentration every month
The Magic MIS Transactions board shows both shares from the first upload of your sales register or invoice list, beside new and returning customers and the top customers by net sales. Each share is worked out from the invoices and credit notes in the files, and opens to show how. The guide to the customer-wise sales report has the rest of what to read beside it.
Read next
- Customer-wise sales report from Tally, Excel or any invoice listA customer-wise sales report each month: net sales by customer after credit notes, new and returning customers and the top customers' share, from the registers you export.
- Sales analysis report: what goes in it, and a monthly one built for youWhat a monthly sales analysis report should hold — net sales, invoices, average invoice, customers, returns and concentration — and how to get one from your own sales register.
- Transactions: a sales and purchase dashboard from your own registersLoad your sales and purchase registers, invoice lists or day book and get a monthly board of sales, purchases, receipts, payments, customers and tax, each document counted once.
Measure your customer concentration
Create an account, add a Transactions company and upload last month's sales register — paid per action from prepaid credits.
Prepaid credits, no subscription.