Concentration Risk
The portfolio risk created when a large share of receivables is owed by a single customer, corporate family, industry, or region.
Concentration risk is the exposure a seller carries when its receivables are not diversified: one customer owing 20 percent of total AR, one corporate family spread across a dozen accounts, one industry (say, homebuilders) representing half the ledger, or one region vulnerable to a common shock. Individually sound credit decisions can still sum to a fragile portfolio, and concentration is the reason portfolio review must exist alongside account-level underwriting.
Measuring concentration honestly requires aggregation the AR system may not do by default: roll up all accounts belonging to one corporate parent, group customers by industry and geography, and express the top exposures as a percentage of total receivables and, more bracingly, as a percentage of annual pre-tax profit. A $2 million exposure to a customer is abstract; "this customer failing costs us 40 percent of this year's earnings" is a board conversation.
Mitigation is a menu, not a single tool: credit insurance on the top names, tighter terms or security (LCs, guarantees, UCC filings) on outsized accounts, contractual protections, pricing that reflects the concentration, and, at the strategic level, sales diversification targets. What concentration risk should not receive is denial, and the most common form of denial is a large customer whose limit has grown with its purchases for years without anyone re-underwriting the aggregate as a deliberate decision.
Worked example
A distributor has $10M in total AR. Its largest corporate family, across four ship-to accounts, owes $1.8M (18% of AR). The company's annual pre-tax profit is $3M. A total loss on this one family, even with 30% eventual recovery in bankruptcy, would consume about 42% of a year's profit. That exposure justifies credit insurance or security regardless of the customer's current risk grade.
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