Client Concentration: How High Is Too High?

There are two kinds of service-based businesses: The kind that has lost a major client and the kind that hasn’t – yet.

Signing a major client can be the best thing to happen to a service-based business. Better cash flow, easier capacity planning, what’s not to love? Not to mention the good feelings that come from building a relationship and investing in a client’s success. A trusted, long-term client lets you do your best work and grow your team.

But no client should be considered a client for life. Clients move on for lots of reasons. They get bought or close up shop. They grow so big they decide to start using an in-house team. (We love losing clients this way). Or they review their vendor list and decide to make cutbacks – Sorry, nothing personal!

Losing your first major client can feel like a gut punch. If you’re a small operation and your revenue takes a hard hit, it means reacting quickly. It might mean letting team members go. Unless you’ve planned for it by building up a healthy cash reserve. 

So, what qualifies as high client concentration?

A service-based business with 10% of revenue or higher from any single client meets the definition. 

When you make that calculation, if you’re working with multiple departments within a company, that’s one single client. Agency expert David C. Baker points out that your biggest risk in working with a large client is not that you screw up. It's that they’re purchased, or they get a new CFO who does a vendor review and slims down the list – and you’ve got no control over that process.

So, what do you do if you have one of those clients on the books? Let them go? 

Definitely not.

On the one hand, work on shrinking each client’s percentage by growing revenue. Invest more in marketing and look for your next big client so that the overall percentage of each one goes down.

On the other hand, high client concentration can be a fact of life for some service -based businesses. It’s a risk factor among many that we consider when helping our clients decide how much working capital to keep in the bank. For those with a highly diversified client base, we might recommend putting aside 10% of annual revenue (depending on other factors, like recurring revenue, pipeline strength, and near-term purchase plans).  

But for those with high client concentration, we’d want to see them put aside a little more, maybe 15% or higher. That cash cushion will allow you to readjust your team and figure out how to build your client roster up again, so you don’t have to end up letting anyone go. (See below the factors that raise or lower your working capital requirements). 

Everyone loves their big clients. When you get to do your best work and count on your bank balance increasing every month, it feels incredible. But you’ve got to keep your eye on the ball and remember the potential downside. At some point, that client will move on.

That’s why you need a two-sided strategy: go on the offensive (shrink that client’s percentage through growth) and play a little defense (set aside extra rainy-day cash).

Set up that plan and you can focus on what you do best: providing excellent work.

If you'd like more help troubleshooting client concentration troubles, sign up for a virtual CFO consultation, and we discuss how our VCFO services could help.