What it means
Analysts and spreadsheet builders like short labels, and "Conc" is one that turns up in column headings and notes. In the context of finance it usually refers to concentration, the degree to which a large share of revenue, receivables, purchases or loans comes from a small number of sources.
Other readings do exist, such as concentrate in mining and chemicals, or concession in some contract schedules. This is why a careful analyst never relies on the abbreviation alone and checks the surrounding notes or asks the author.
Concentration matters because dependence creates risk. If one customer provides 40% of revenue, the loss of that customer can threaten the whole business, and lenders and buyers will discount a company accordingly.
The same idea applies on the other side. A company that buys most of a key component from one supplier is exposed to price increases and supply disruption, and a bank with too many loans to one sector or borrower faces correlated losses.
Accounting rules often require disclosure. Companies must typically explain when a single customer accounts for a significant proportion of revenue, and banks report their large exposures, because users need to know about the dependence.
Managers can reduce concentration by diversifying customers, spreading purchasing across suppliers and setting limits on exposure. The aim is not zero concentration, which is unrealistic for many small firms, but a level that the business could survive if the largest relationship ended.
In practice
Real-world examples.
Example
A bank credit committee reviews a loan book of $200,000,000 and sees that $50,000,000 is lent to property developers. The 25% concentration in one sector leads the committee to set a cap on new property lending. The cap is reviewed every year, and breaches are reported to the board.
Example
A small manufacturer with $4,000,000 of revenue finds that one supermarket chain accounts for $2,200,000. Its owner works on adding new customers so that no single account exceeds 30%. He also negotiates a longer contract with the supermarket to protect the existing relationship.
Example
A buyer examining a software firm discovers that its three biggest customers make up 60% of recurring revenue. The buyer lowers its offer and asks for a retention bonus for the sales team. The buyer's adviser also asks for the contract expiry dates of those three customers.
Formula
Calculation
Concentration ratio = (Amount from the largest relationships / Total amount) x 100
A consulting firm has annual revenue of $3,000,000. Its three largest clients pay $500,000, $250,000 and $150,000, which totals $900,000. Concentration ratio = ($900,000 / $3,000,000) x 100 = 30%. The single largest client represents $500,000 / $3,000,000 = 16.7% of revenue.Case study
Seen in the real world.
Falconridge Metals is an illustrative, fictional machining business whose management report included a column labelled "Conc" next to each customer. Few of the managers could say exactly what it measured, and the figure had not been looked at for years.
When a new finance manager asked, she found it was the customer's percentage of total revenue. The column showed that one automotive customer represented 48% of sales, a figure that had crept up from 30% as the relationship grew.
Her analysis showed that the loss of that customer would force the company to lay off about a third of its staff. In this illustrative story the board set a rule that no customer should exceed 35% of revenue, relabelled the column "Customer concentration, % of revenue" and began a campaign to win new accounts. Within two years the largest customer fell to 36% of sales, mainly because the other accounts grew.
Watch out
Common mistakes.
- Assuming an abbreviation such as Conc has one standard meaning, when it can stand for several terms.
- Looking only at revenue concentration and ignoring concentration in suppliers, receivables and loans.
- Treating a big customer as safe because it is large, when the real question is how easily the business could replace its revenue.
Questions
People also ask.
What does Conc usually mean in finance?
In most analysis it means concentration, but you should check the document's notes and column definitions before relying on that. If the document is your own, spell the word out in full. A short glossary on the first page of a report prevents the problem altogether.
What level of customer concentration is a concern?
Many lenders and buyers become cautious when one customer exceeds 10% to 20% of revenue, but the right level depends on the contract and the sector.
How can concentration risk be reduced?
By diversifying customers and suppliers, signing longer contracts with large accounts and setting internal limits that are reviewed regularly. Banks and investors will want to see that the limits are actually monitored.
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