We have lots of customers, but a few generate most of our profit. How should I measure our concentration risk before selling?

Question

Tyler Smith · Accepted Answer

Measure concentration by both revenue and gross profit. Customer count alone can make a business look diversified when its earnings still depend on a handful of accounts.

Build a customer-level schedule that reconciles to your financial records. For each major account, show revenue, direct costs, gross profit and its share of the business totals. Compare consistent periods so a seasonal purchase or unusually large project does not distort the picture.

Review these measures together:
- The largest customer's share of revenue and gross profit.
- The top five customers' combined shares.
- Whether those shares are increasing or decreasing.
- Whether losing an account would leave costs that cannot quickly be removed.

Use a consistent method for allocating direct costs, and explain its limitations. If customer-level profitability is not currently available, work with your accountant to develop a defensible estimate rather than presenting unsupported precision.

An account with a modest revenue share can still represent substantial earnings exposure if it is especially profitable. Conversely, a high-volume account may contribute less gross profit than its sales suggest.

My recommendation is to make this schedule a regular management review, not a document assembled only when a buyer asks. Use it to prioritize profitable diversification. Adding small, low-margin customers may improve the customer count without materially reducing dependence on the accounts that sustain earnings.