When your business changes
What Changes When You Become Dependent on a Major Customer?
Customer concentration often develops through a series of sensible decisions rather than one dramatic contract. The risk becomes material when revenue, capacity, cash flow and key relationships all begin depending on the same source.
Change in practiceIllustrative example
An automotive supplier's largest customer grows from a fifth of turnover to well over half across three successful years. It does not happen through one dramatic contract. Each year's extra capacity is allocated to the account that is easiest to grow, and each investment decision is made with that customer's roadmap in mind. No one on the board formally decides to concentrate the business this way. It simply becomes the shape of the business.
This is the gradual counterpart to winning one major contract. Recognise it when a customer or connected customer group represents a large and rising share of turnover or contribution over consecutive periods; when new capacity, tooling and investment are allocated disproportionately to that account; when the relationship depends on one or two named contacts; or when pricing, payment and contractual terms are increasingly shaped by that customer's expectations rather than the wider market.
There is no universal percentage at which concentration becomes unacceptable. Materiality depends on how quickly the business could replace the lost contribution, redeploy the committed capacity and absorb the cash impact.
Revenue, contribution and cash flow are now more closely correlated with the decisions of one customer group: its trading performance, sourcing strategy, programmes, payment behaviour and willingness to renegotiate terms. The negotiating balance may also have shifted as the commercial cost of losing the account has grown.
The exposure is not limited to future orders. Outstanding receivables, work in progress, finished stock, customer-specific materials and unrecovered investment can all accumulate behind the same relationship. If the concentration has not been quantified and reported, the picture held by lenders, insurers or other stakeholders may no longer match the business as it operates today.
The business now depends on one relationship continuing on broadly similar volumes, terms and payment behaviour. Capacity, tooling, approvals, materials and inventory may have been built around a particular customer, programme, vehicle platform, site or geography, with limited value elsewhere.
The relationship itself may depend on a small number of people on both sides. Customer dependency and key-person dependency can therefore sit on top of each other: one internal commercial lead speaking to one customer contact about a programme that uses dedicated capacity. Concentration should be mapped across the customer group, programme, site, people, tooling, stock and receivables—not measured only against the name on the invoice.
If the customer pauses orders, delays payment or materially reduces demand, the shortfall will not scale cleanly through the business. Wages, rent, finance repayments and other committed costs remain while incoming cash and production utilisation fall.
During the first month, the business may also be holding unpaid invoices, work in progress, finished goods or specialist materials connected to that customer. Management must determine what can be recovered, sold or redeployed; protect liquidity; test any covenant or facility assumptions; and find alternative work for capacity that may have limited use outside the customer's programme.
- Financial Exposure — revenue concentration, debtor balances, working capital and fixed costs determine how much loss the business may need to absorb and how quickly.
- Growth & Change — the concentration may be the accumulated result of reasonable decisions that were never reviewed together as one material shift in the business.
- Operational Resilience — dedicated capacity, tooling, materials, approvals and people may be difficult to redeploy if the customer, programme or site becomes unavailable.
Track concentration by turnover and gross profit or contribution—not revenue alone—and show the trend over at least three years. Add current receivables, work in progress, finished stock, customer-specific materials and committed capacity so the board can see the full exposure behind the percentage.
Review the contract, order mechanisms, forecasts, termination rights, tooling ownership and any unrecovered investment. Examine the customer's financial strength and payment pattern, plus the position of its wider group, programme and end market. Check relevant lender or facility terms and establish what protection, recovery or trade-credit arrangements exist without assuming non-payment has been transferred. Finally, map the relationship contacts on both sides and test whether it survives the loss of any one person.
- 01What percentage of turnover, contribution, receivables and production capacity has this customer group represented in each of the last three years, and did we choose that trend deliberately?
- 02If the customer halved orders, delayed payment or stopped buying tomorrow, how long could we sustain committed costs and liquidity before action became unavoidable?
- 03How much work in progress, finished stock, specialist material, tooling and unrecovered investment would be difficult to redeploy outside this customer or programme?
- 04Has dependence changed our negotiating position on price, payment and contract terms, and has the board consciously accepted where that balance now sits?
- 05Would our lender, insurer or another informed outsider describe this concentration differently from the way we currently report it internally?
- 01During material growth, report customer concentration quarterly across turnover, contribution, receivables and committed capacity, with a clear trigger for board review.
- 02Write and quantify a 30-day stress test covering order reduction, payment delay, fixed costs, working capital, customer-specific assets and the realistic ability to redeploy capacity.
- 03Set a board-approved concentration tolerance and direct new capacity, relationship development and business-development effort towards reducing the dependency over a defined period.
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