Hiring guide
A customer-concentration stress test before renewing a big contract
By CFO Index · Published
Customer concentration is not just the share of sales represented by your largest client. Before renewing a material contract, ask what happens to contribution, committed costs and cash if that relationship shrinks or ends. A fractional CFO can build a decision case without predicting whether the customer will leave.
Calculate exposure on a consistent basis
Start with customer revenue divided by total revenue for the same period, entity scope and currency basis. Decide whether related customer entities should also be reviewed as a group. Distinguish end-customer exposure from an intermediary that processes many unrelated buyers. Repeat the view for receivables and future contracted work, but keep those measures separate. There is no risk verdict in a percentage alone: notice periods, margins and replacement capacity also matter.
Define the event you are testing
Specify whether the customer does not renew, reduces volume, requests a discount or delays paying existing invoices. These are different scenarios. Record the date each change could first affect delivery, billing and receipts. Ask the commercial owner to verify the contract assumptions and involve legal advice where interpretation is needed. Do not assume that all sales and all cash disappear on the same day.
Work through the contribution, not only the lost revenue
Hypothetical monthly illustration: a company earns €200,000 revenue, including €60,000 from one client, so that client's revenue share is 30%. Of the costs associated with the client, €18,000 would stop immediately if work ended. The initial reduction in contribution is therefore €42,000, not €60,000. Another €12,000 of committed capacity remains payable for three months; do not count it as an immediate saving. This simplified example excludes other effects and is not a benchmark.
Build a dated cash case beside the profit case
List expected receipts for work already completed, future billing that would cease and payments that remain committed. The SEC's financial-statement guide distinguishes profit from cash generation; that distinction matters when a contract ends but earlier invoices are still collectible. Test collection uncertainty separately from lost future business. Do not mechanically deduct the revenue share from the bank balance or count an existing receivable twice.
Make replacement assumptions explicit
A sales pipeline is not replacement cash. Identify the time needed to win, deliver, invoice and collect from new work. Show an unchanged-cost case before adding management actions, then label which savings or redeployments have actually been approved. If staff can serve another client, check demand and operational capacity rather than treating every released hour as sold. The purpose is to reveal dependencies, not to make a downside case look comfortable.
Use the model during the renewal discussion
Compare the proposed renewal with alternatives management can genuinely choose: a different volume commitment, staged staffing or a revised delivery scope. Ask which commitments should wait until the customer confirms. Define a decision owner and date for each action. A CFO's model can support the negotiation, but it cannot determine enforceability or guarantee retention. Keep commercial judgement and legal review visible where the decision requires them.
What a useful CFO assignment produces
Request an exposure schedule reconciled to the reporting period, a lost-or-reduced-client scenario, an assumptions register and an action calendar. Have someone internally change the renewal date and trace the resulting cash movements. Use the findings to choose what to monitor, not to label a large customer as inherently undesirable. A concentrated relationship may still be a deliberate choice when management understands the terms and consequences.