Why small businesses should diversify their revenue sources
Running a small business can present many challenges, and a single-minded approach can help you overcome many of them. Having a clear vision of what you want to achieve and how you will achieve it is valuable – but that fixed vision can mean that you lose sight of the bigger picture.
If your vision is based on a single income stream, you could be putting your business at risk. You could be missing out on chances to diversify – giving your business a broader base for its success and greater stability when things don’t go to plan.
A single, lucrative client or successful product can seem to be all your business needs when things are going well but, in fact, it can place you at risk.
You begin to rely on that fixed income stream and start to believe that you don’t need to bother with tackling fresh opportunities. You may be aware of the grim statistic that suggests that 75% of businesses that fail at launching new initiatives and markets, and decide you can afford not to take the risk of being among them – because things are fine as they are.
But this approach can leave you and your business vulnerable. Clients can go elsewhere, without warning. Great products can be bettered by a competitor. A change in market conditions can mean that your best seller is not selling any more.
Are you too concentrated on one revenue stream?
Having one lucrative revenue stream can easily demand increasing time and focus until it takes over everything. It might be your first cherished client or customer, or it could be the income source that has been most rewarding. However, it could become an obstacle to growth and success that takes up too much of your energy and resources, leaving you little with which to take advantage of new opportunities.
Once this happens it is hard to untangle yourself afterwards – and far harder than preventing it in the first place.
It’s all too easy to forget the need to stay hungry and to become complacent when the revenue is flowing in, but, in business, you simply can’t rely on it continuing to do so. If your key income stream dries up you will still have to pay outgoings while working frantically to replace it.
You need multiple sources of income to safeguard your business' future. Diversifying your revenue stream is essential – and we look at how it is done
“By establishing and maintaining multiple streams of funding… organizations are able to avoid excessive dependence on any single revenue source, stabilize their financial positions, and thereby reduce the risk of financial crises." Peter Frumkin and Elizabeth K. Keating In Diversification Reconsidered
No matter how well things might seem to be going now, you can’t afford to be complacent that they will stay that way. The only way to safeguard against future financial crises is to continually be on the lookout for new sales to build a solid portfolio of clients and customers.
Even if you are pushed for time with your existing work, you need to dedicate an hour each day to push for new sales.
Set aside some time every day to capturing and chasing leads. You’ll be surprised by how much you can achieve, even if you allow an hour a day. Of course, not every call will lead to a sale, but the more calls you make, the more meetings you get and, in turn, the more sales you generate. If it takes one hundred calls to get 10 meetings and they result in just one sale, it means uphill work. But when you do make the sale you will be all the more delighted.
The real message is to start on those 100 calls now. As you get better and more confident, your pitch gets cleaner, meetings more productive and your score will increase.
Of course, if your resources allow for it, create a dedicated role in the team designed solely for securing new business, so that you’re looking for new sales at all times.
The competition will be tough, so make the most of your resources by developing new products or services.
Look at what you do now. Could you do it better? Are there ways to cut costs, improve quality or add features? A better product is easier to sell and harder for your competitors to beat.
If you are a wedding photographer you could start offering videos of the big day – or even a drone to give a birds-eye view as the bride steps out of the limo!
One of the pitfalls for start-ups is that they often don’t have the resources to develop new products, but the process is vital for your survival. It can take time and experience to identify your strengths or strategic assets and find new way to use them, but it will be time well spent.
So, if you run a garage servicing diesel vans, think about branching out into MOTs or even diesel passenger cars. Or take an even more radical approach and look at electrics.
Developing new products or services could help you find new customers and segments to work in – or lets you find new ways to upsell to your existing customer base. Or you could jump into an entirely new market segment, with a new customer base, to take advantage of new growth potential.
Look what your competitors are doing
Keeping an eye on what your competition is doing is a good way to use their good ideas in your own business – and head off trouble before it hits.
What are they doing that you could replicate? This will allow you to see where you can potentially add value for current customers with new products or services, or how you could use your resources better to add value or to open up an entirely new market.
If your competitors bring out a new product you may need to do the same. If they are diversifying into new areas, you might need to follow their example.
It’s easy for one revenue stream to drain your energy and distract from growth – but you might be able to use the facilities and skills that let you provide it in a new way.
If you run a shop, make sure you have an online presence where people can make purchases without ever having to come in.
If you run a gardening business, you have a van and trailer. Could you use them to offer a rubbish removal service – or what about delivering barbecues and garden furniture?
Are there any gaps in the market that might be lucrative? Is there something your customers keep searching for that you could provide? Using your knowledge of their needs can help you find untapped avenues for expansion.
A broad base of revenue
The ideal position to be in is to have several sources of income for your business, all of which use the same equipment and skills.
Time is money of course. You need to spend the right amount of time on each revenue source. This means allocating the appropriate time and resources for each revenue stream and managing accordingly. If one particular stream becomes unmanageable you can see that you have a problem that needs resolving. But your entire revenue stream will not be on hold until you have done so.
And remember, don’t let any aspect of your diversified business get to the stage where it compromises other revenue streams or other areas of the work.
Diversification of funding
It is not just your work itself where diversification is vital. You need to look at your financial arrangements – and at diversifying your funding. In uncertain economic times, banks are increasingly frugal with overdraft facilities and traditional forms of funding. The financial crisis of 2008 and the stagnant conditions that followed close behind it meant that high street banks raised the barriers to entry for SMEs seeking funding.
Chancellor Rishi Sunak has said that he believes the post-Covid period will see the UK heading into a recession. With money in short supply, business will be slow in every sector. You may be facing plunging revenues and a slowdown that could take a year or more to be over. The time to diversify is now.
Fortunately, other sources of funding emerged as financial innovation and new digital technology offered a new range of options to business owners.
Funding for your business could now include peer-to-peer lending, Invoice Financing and Asset Finance – and the list goes on. Many SMEs remain unaware of the options available, fail to shop around for finance, and continue to go directly to their bank to apply for an overdraft or loan, often on unattractive terms if they can secure one at all.
When it comes to business finance, diversification can mean securing higher levels of funding than might be available form a single source – and at more attractive rates.
Whilst the chaos of the last decade led to more finance options, seeking diversity in funding is equally important in stable market conditions. In fact, you should be diversifying your approach to business financing during times of prosperity – because you never know when a downturn may come. In stable times, complacency can set in and many businesses rely on a low number of traditional forms of finance because they don’t foresee a situation where a lack of options can hurt them.
The first step is to break down your funding requirements into immediate, medium-term and long term needs.
There is always a need for short-term cash, and the easiest solution may be is the old fashioned overdraft. It may be available from your high street bank – but if not, an independent lender may be able to provide a line of credit or overdraft replacement that works in much the same way.
Short-term loans can also be made available, often in a matter of days.
Over the medium-term, a business can look to Asset Financing to provide them with the tools and equipment they need.
For the long term, they can avoid the effects of slow-paying customers with measures such as Invoice Financing and using specialist lending – with products such as Stock Finance or Inventory Finance to make cash flow easier to manage.
Technically, Invoice Finance simply lets you use your unpaid invoices as the security for lending. But, in practical terms, it means that you get paid up to 80% of an invoice as soon as you issue it, and the remainder, less the lenders costs when your customer pays.
Over the long term, larger SMEs can call on commercial mortgages to buy premises or investment property.
The most important thing is to get specialist expert help to ensure that you have the type of funding you need - and the most competitive source for it.
How we can help
At Rangewell we are experts in business funding, and we can help you not only find the solutions you need but help you find them at the most competitive rate. We can work with you to find solutions, and we know the lenders who are able to take a sympathetic view of applications from businesses who want to diversify their income streams
The lenders we work with look at the whole business case presented to them for finance, and having a business downturn in the current environment need not prevent you from getting the funding you need.
We’ll work with you and help you present your case to lenders. Call us now to start diversifying your business.