A S BANKA ADVISORS

Key Takeaways

• Customer concentration risk for startups means one customer, or a handful, carrying so much of your revenue that losing them would change the business. It is a number you can measure every month, not a feeling.
• Three numbers give you the picture: the share of revenue from your largest customer, the share from your top five, and the share of what you are owed that sits with one customer.
• Indian companies that report under Ind AS must disclose, in their financial statements, the fact that a single external customer brings in 10 per cent or more of revenue, and the revenue from each such customer.
• Ind AS applies to listed companies (other than those listed on an SME exchange), to unlisted companies with a net worth of Rs 250 crore or more, and to their holding, subsidiary, joint venture and associate companies; any company may adopt it voluntarily.
• Our view: concentration is not a reason to turn a large customer away. It is a reason to know your numbers, read the contract that customer signed, and show a plan before anyone asks.

Your largest customer is the best proof that your product works. Read by an investor, a lender or a buyer, the same customer is also the first risk they will want to size. Customer concentration risk for startups in India is the gap between those two readings, and it is one of the few risks a founder can measure from their own books in an afternoon.

This guide covers what customer concentration is, how to measure it, the one place Indian accounting rules make a company state it in writing, what a diligence team can ask about it, and how to reduce it without turning good revenue away.

What is customer concentration risk for startups?

Customer concentration is the share of your revenue that depends on a small number of customers. The risk is simple: if one of them leaves, pays late, renegotiates the price or is acquired by a company that does not need you, your revenue, cash and plan move with them.

For an early-stage company, some concentration is not unusual. The first enterprise contract can be the business for a while. The question is not whether you have a large customer. It is whether you know how large, how secure, and what happens to the company if that customer goes.

How do you measure customer concentration in a startup?

You need three numbers, worked out from the same revenue figure your accounts use:

1. Largest customer share: revenue from your single largest customer divided by total revenue for the period.
2. Top five share: revenue from your five largest customers divided by total revenue.
3. Receivables share: the amount your largest customer owes you divided by your total trade receivables at the period end.

Work each one out for the last twelve months and for each quarter inside it. A single number tells you where you are. The quarterly trend tells you whether you are getting less dependent or more.

Two details change the answer, so decide them once and keep them consistent:

• Treat related buyers as one customer. Three subsidiaries of the same group are one relationship. If the parent decides to switch vendors, all three go together.
• Use recognised revenue, not cash collected. An annual contract paid upfront can make one customer look far larger in the month the money arrives than across the year. Our guide on unit economics for startups covers why the accounting number, not the bank balance, is the one to track.

Is there a rule that makes a company disclose its largest customers?

Yes, for companies that report under Indian Accounting Standards. The Ind AS on operating segments requires an entity to provide information about the extent of its reliance on its major customers. If revenue from transactions with a single external customer is 10 per cent or more of the entity’s revenue, the entity must disclose that fact, the total revenue from each such customer, and the segment or segments that report it.

Three details in that standard matter for founders:

• The name can stay private. The standard says the entity need not disclose the identity of a major customer. The fact and the amount are what get disclosed.
• A group counts as one customer. A group of entities known to the reporting entity to be under common control is treated as a single customer.
• It applies to every Ind AS company. The Indian version of the standard applies to companies to which Ind AS applies, and its entity-wide disclosures, including major customers, apply even to a company with a single reportable segment.

A separate Ind AS, on financial instrument disclosures, requires disclosure of concentrations of risk where they are not apparent from the other disclosures, for example receivables concentrated in one counterparty, including how management determines concentrations and the amount of the exposure. For a startup with one large customer that pays on long terms, the receivables side can be as visible as the revenue side.

Which companies report under Ind AS?

The Companies (Indian Accounting Standards) Rules, 2015 require Ind AS for:

• companies whose equity or debt securities are listed, or in the process of being listed, on a stock exchange in India or abroad;
• unlisted companies with a net worth of Rs 250 crore or more;
• the holding, subsidiary, joint venture and associate companies of the companies above.

The same rules say these mandatory requirements do not apply to companies whose securities are listed, or in the process of being listed, on an SME exchange, though such a company may still adopt Ind AS voluntarily. Any company may choose Ind AS voluntarily, and once a company applies it, the rules say it must keep applying it. An Indian company that is the subsidiary of a foreign company prepares Ind AS financial statements if it meets these criteria.

An early-stage startup below these lines that has not opted in prepares its accounts under the older Accounting Standards, and this disclosure does not apply to it. It becomes relevant on the road to a mainboard listing, when net worth crosses Rs 250 crore, or when the company becomes a subsidiary or associate of a company that reports under Ind AS.

What a diligence team can ask about concentration

Whether or not any rule makes you disclose it, an investor, lender or acquirer doing diligence can ask for revenue by customer. Our financial due diligence checklist covers the wider list; on concentration, the questions tend to fall into four groups:

• The numbers: revenue by customer for each period, the largest customer and top five shares, and receivables by customer with their ageing.
• The contract: its term and renewal date, how much notice the customer must give to end it, whether it can be ended without cause, and any exclusivity or most-favoured-pricing clause.
• Change of control: whether the contract lets the customer terminate or renegotiate if your company is acquired or its ownership changes. A buyer can read this clause before it reads your pitch.
• The relationship: how many people at the customer use or sponsor your product, and whether the revenue depends on one person who could leave.

Having those answers ready, in one sheet, with the contracts in your data room, turns a concentration question from a surprise into a line item.

Five clauses to read in your largest customer’s contract

Pull out the signed agreement with each customer above 10 per cent of revenue and note, for each one:

1. Term and renewal: when it ends, and whether it renews automatically or needs a new signature.
2. Termination: whether the customer can end it without cause, and on how many days’ notice.
3. Change of control: what happens if your company is sold or a new investor takes control.
4. Price protection: any clause that ties your price to what you charge others, or caps increases.
5. Payment terms: how many days the customer has to pay, and what you can do if it pays late.

None of these clauses is unusual on its own. Together they decide how much of that customer’s revenue a reader can treat as secure.

How to reduce customer concentration without turning revenue away

Concentration falls in two ways: the large customer stays and the rest of the business grows, or the large customer’s revenue becomes more secure. Both count.

• Set a ceiling in your own plan. Decide the largest share any one customer should carry in twelve months, and plan new-customer revenue to get there.
• Lengthen and secure the big contract. A longer term, a longer notice period and a change-of-control clause you can live with make the same revenue far less fragile.
• Widen the relationship. More users, teams or business units inside the same customer reduce the chance that one decision ends it.
• Watch the receivables. Agree payment terms you can carry, invoice on time and follow up on overdue amounts, so one customer’s slow payment does not become your cash problem.
• Report it. Put the three numbers in your monthly investor update. A trend you report before you are asked is read very differently from one a diligence team finds.

Customer concentration on the way to an IPO

If a listing is on your horizon, concentration stops being an internal metric. A company preparing to list on a mainboard exchange moves to Ind AS, and the 10 per cent disclosure then sits in its financial statements. Our guide to SME IPO readiness covers what the books need to look like before a filing. Changing a concentration picture can take years, so the time to start is well before the first draft of any offer document.

Frequently asked questions

Does a private startup have to disclose its largest customer?

Only if it reports under Ind AS. A company that does must disclose the fact that a single external customer brings in 10 per cent or more of revenue and the revenue from each such customer; it need not name the customer. A startup that prepares accounts under the older Accounting Standards is not subject to this Ind AS requirement, though a diligence team can still ask for the numbers.

Do group companies of one customer count separately?

Not under the Ind AS disclosure. A group of entities known to the reporting entity to be under common control is treated as a single customer. Measuring them as one in your own numbers is the safer habit too.

Does listing on an SME exchange bring in Ind AS?

No. The Ind AS rules say their mandatory requirements do not apply to companies whose securities are listed, or in the process of being listed, on an SME exchange. Such a company may still adopt Ind AS voluntarily, and once it does, it keeps applying it.

The bottom line

A large customer is an asset. An unmeasured one is a risk someone else will size for you. Work out the three numbers, read the five clauses, and put both in front of your board before a diligence team asks. Our view: the founders who handle concentration best are not the ones with no large customer. They are the ones who already know the answer to every question about it.

Building a company where one or two customers carry much of the revenue, and want the numbers, contracts and plan ready before your next round or sale? You can book a quick call with A S Banka Advisors Private Limited.

Sources: Ministry of Corporate Affairs, Companies (Indian Accounting Standards) Rules, 2015, rule 4, as amended (mca.gov.in). Ministry of Corporate Affairs, Indian Accounting Standard (Ind AS) 108, Operating Segments, and Indian Accounting Standard (Ind AS) 107, Financial Instruments: Disclosures, as on 1 April 2025 (mca.gov.in).

Disclaimer: This article is general information for founders and is not legal, tax, accounting or investment advice. It states the position as on the date of publication; confirm the current position for your company before acting.