If your main customer were to cut its orders in half tomorrow—even with a full order book—your company could find itself in a difficult financial situation if a significant portion of its revenue depends on a single customer.
How do you assess the risks?
Do you know what percentage of your revenue is generated by your largest customer? To calculate it, use this formula: Sales to the largest customer ÷ total sales × 100.
Let's take the example of a company with $200,000 in annual sales, $80,000 of which comes from a single customer. That customer therefore accounts for 40% of the company's revenue.
If that customer’s orders were to drop by half, annual revenue would fall to $160,000, assuming no replacement sales. This 20% drop could strain cash flow, since certain expenses—such as rent, insurance, and loan payments—remain unchanged. Planning for different financial scenarios allows you to anticipate difficulties and better manage your cash flow.
Is your biggest customer really your most profitable one?
Significant discounts, rush orders, additional shipments, or unexpected overtime: several factors can reduce your profit margin.
Payment terms also play a significant role. When you have to pay your suppliers and employees before collecting payment on your invoices, your working capital can come under additional pressure. The key, therefore, is to assess what each contract actually brings in, after factoring in costs.
Four Strategies for Diversifying Your Customer Base
These steps help reduce your reliance on a single major client and limit financial risks.
- Keep up your sales outreach efforts, even when your order book is full.
- Reach out to your former clients to find out about their new needs.
- Expand your existing business relationships by exploring new opportunities for collaboration.
- Target new markets to avoid concentrating your revenue in a single industry.
To take this a step further, analyze the proportion of your sales that come from your three largest customers and assess the financial impact of a potential decline in orders. Our business advisors can help you analyze your financial situation and plan your business projects.
