A big part of achieving sustainable growth in your consulting business is ensuring no single client represents a large part of your revenue. The reason is simple: Putting all of your eggs in one basket is risky. But how many baskets do you need?
Some say the target depends on your field and services, but I disagree.
Sure, what you sell and to who you sell it influences your revenue mix. But the question here is related to financial risk (or security), which means the most important factor to consider here is revenue, or more specifically total fee earnings.
Below I list the target numbers I share with clients. To be clear, there's no consensus here - I've seen different recommendations from different analysts, and combined them with my real-world experience advising firms to determine something sensible.
- For consulting practices under $100,000/year, your largest client shouldn't exceed 33% of your total revenue. It's what most freelancers or new independent consultants should aim for to create a healthy growth.
- For firms doing between $100k-1M/year, it shouldn't exceed 25%. It's the same benchmark David C. Baker uses for creative firms and agencies.
- For firms doing between $1M-10M/year, it shouldn't exceed 15%. This is based on numbers from the latest Benchpress reports with boutique consulting firms.
When your client concentration creeps up over those targets, your chances to go out of business should your biggest client leaves are considerable. And if you're wondering how firms are actually doing: I estimate only 20-25% to have numbers below the targets. Most consultancies are not as robust as they'd like to imagine.
An important caveat though: your cost structure will impact those targets.
The financial risk here lies not in profitability, but in cash flow. This means that to establish healthy client concentration rates, we should consider not only revenue but also fixed costs.
If your firm makes big use of digital assets and keeps an ultra-lean cost structure, you can certainly be more permissive. But for those of you who have a larger team and direct most of your revenue to payroll, rent, or equipment, this issue deserves constant attention.
Bringing in more money is almost always positive. But for the growth to be sustainable, the practice can't rely on one client.