The Single Point of Failure: A Director’s Concentration Review

A company can be profitable and fragile at the same time. Concentration risk rarely appears as a line in the monthly management accounts, yet it can determine whether a temporary disruption becomes a cash-flow crisis. For UK owner-managers, the practical question is not whether dependence exists — most growing businesses have some — but whether the board understands its size, its shape and the point at which it requires action.

Define the exposure before setting a threshold

Concentration is not measured by revenue alone. A customer that represents 18% of turnover but 35% of gross profit, pays on 60-day terms and accounts for a large share of work in progress is a more significant exposure than the headline percentage suggests. A supplier that provides a low-cost component may matter less than one that supplies a critical input with a twelve-week lead time and no qualified alternative.

The board should therefore define concentration by dependency and impact. Illustrative starting points might be a customer representing more than 20% of revenue or more than 30% of gross profit; a supplier representing more than 25% of spend or acting as a sole source for a critical input; or a sales channel representing more than 40% of turnover. These are prompts for review, not universal rules. A specialist manufacturer with one long-term contract may rationally accept a higher threshold than a consumer business exposed to platform algorithm changes.

A five-part test for each material relationship

A simple concentration scorecard should cover five dimensions.

• Revenue and margin share. Calculate the rolling twelve-month contribution and the forward six-month pipeline. Revenue share alone can understate the loss of a high-margin account.
• Credit and cash exposure. Review trade receivables, payment terms, overdue balances, credit limits and any credit insurance cover. A large customer that pays late can be a bigger liquidity risk than a smaller one that pays on time.
• Contract and exit terms. Note notice periods, termination rights, change-of-control clauses, price review mechanisms, exclusivity and service levels. A relationship that cannot be exited quickly is a governance issue as well as a commercial one.
• Operational dependence. Consider lead times, single-site production, tooling, certifications, software integration and the concentration of specialist knowledge in a small number of staff.
• Substitutability. Estimate the time and cost required to replace the relationship. A qualified alternative supplier or a realistic new customer segment matters more than a theoretical list of competitors.

Each relationship can then be scored high, medium or low. The purpose is not to produce a complicated model, but to give the board a consistent basis for discussion.

Set thresholds that trigger action, not anxiety

A threshold is useful only if it is linked to an agreed response. A three-tier approach works well. Below the threshold, the relationship is monitored through normal management reporting. At the amber level, a named director or manager should review the exposure quarterly and note it in the board pack. At the red level, the board should require a written mitigation plan, a cash-flow sensitivity and a contingency timetable.

For example, a customer above 20% of revenue might be amber; above 35% might be red. A supplier above 25% of spend might be amber; above 40%, or any sole-source supplier of a critical input, might be red regardless of spend. A sales channel above 30% might be amber and above 45% red. The figures should reflect the company’s sector, margins and ability to absorb disruption, but they should be set deliberately and recorded in the board minutes.

Contracts, insurance and the limits of both

Contract terms are the first practical defence. Notice periods, service-level commitments, business-continuity obligations and clear price-review clauses give the company time to react. For suppliers, consider whether a second source can be qualified, whether buffer stock is justified and whether tooling or intellectual property would be recoverable if the relationship ended.

Insurance can support the position but should not be mistaken for a solution. Trade credit insurance may cover insolvency or protracted default, subject to limits, exclusions and discretionary cover. It does not replace a lost customer, retrain a workforce or qualify a new supplier. The board should understand what is insured, what is excluded and how quickly a claim would convert into cash.

A 90-day plan to reduce exposure without destabilising relationships

Reducing concentration is rarely achieved by issuing ultimatums. A calmer approach is to treat it as continuity planning for both sides.

Days 1–30: measure and verify. Build a register of the top five customers, suppliers and channels by revenue, gross profit, spend and cash exposure. Reconcile sales, finance and operational data. Agree the board thresholds and identify which relationships are amber or red.

Days 31–60: test alternatives and open conversations. Meet key accounts and suppliers to discuss forecasts, service levels and continuity arrangements. Ask what would happen if volumes changed sharply in either direction. Identify adjacent customer segments, qualified alternative suppliers and the true cost of switching. Keep the tone collaborative: the aim is resilience, not suspicion.

Days 61–90: implement safeguards and report. Assign owners and deadlines for the mitigation actions. Update the cash-flow forecast and budget for any dual-sourcing cost, buffer stock or insurance premium. Report progress to the board and set a review date. Where a relationship remains red, document the contingency plan and the conditions that would trigger it.

The board’s ongoing discipline

Concentration risk should sit alongside cash flow and covenants in the board pack, not in a separate risk register that is reviewed once a year. A one-page dashboard showing the top five relationships, their share of revenue or spend, their margin or criticality, their current rating and the status of mitigation actions is usually sufficient. Reviewed quarterly, it gives directors an early warning without creating an administrative burden.

Dependence is not inherently bad. Many strong UK businesses have been built on a small number of deep relationships. The risk lies in not knowing where the single point of failure sits — or discovering it only when a customer, supplier or channel changes course. A measured concentration review gives the board time to choose its response rather than have one imposed on it.