2016-12-21 00:00:00 Running a Business English Learn what the term concentration means to small businesses and learn a unique way to measure it to see if your business is at risk. https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/03/small-business-owner-fulfulls-order-for-his-primary-client.jpg https://quickbooks.intuit.com/ca/resources/business/small-business-terms-what-is-concentration/ Small Business Terms: What Is Concentration?

Small Business Terms: What Is Concentration?

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Concentration is a measure of how much of your revenue is coming from one specific client or partner. If too much business is coming from too few clients, this can signal danger for the business since at any time a client may stop using your product or service, causing revenues to drastically drop or even your business to close.

Though used for anti-trust cases, a small business can get a rough idea of its concentration by using the Herfindahl index. Simply take the revenue percentages of each client as whole numbers, square them, and add them up. For example, if a company has three clients comprising 20%, 30%, and 50% of their revenue, the index would be:

20^2 + 30^2 + 50^2 = 400 + 900 + 2,500 = 3,800

Any value above 2,500 indicates that the business is too concentrated and needs more clients.

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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