Small Business Diversification-Feb 2006

Understand your current customers, products, and cash flow

To strengthen your small business by diversifying you need to really understand your current customers, products, and cash flow.  You must examine the impact of diversification on each of those three dimensions.  You might choose to diversify by finding new, different customers in another market niche.  You might also diversify by adding new products or services that will appeal to current customers or to new customers.  For either of these choices you need to understand the cash flow impact of your decision.  Cash flow is critical for the small business owner and so any diversification effort must increase and improve your cash flow to truly be successful. 

Diversify to improve cash flow

If your current customer base or product line has a long sales cycle or extended accounts receivable, then you should diversify in to something that brings in cash faster and more predictably.  A maintenance or service contract is a good way to accomplish that.  Likewise, if you are only paid when you deliver a product or service you should look to for some type of residual income stream like a subscription service.  For my consulting and training business I diversified in to financial services.  I now offer a web based service for business to direct bill their customer’s checking or savings accounts.  I get paid in a per transaction basis and so have some additional cash flow even when I am not training or consulting.

Don’t cannibalize current customers or products.

While diversification is important, you don’t want to damage existing customers or products in the process.  You might cannibalize existing business if your new customers or products or services are seen as competing with or detracting from the current base.  If your business image is that of a luxury/high end provider then there is a lot of risk if you diversify in to low end or budget products.  If you diversify by adding new/different clients that are rivals of your existing clients then you might also have problems.  You can escape some of these issue by diversifying through another business name.  I founded GizmoPhd.com  to provide a different set of services and products than those offered by Prometheus Performance Systems.  GizmoPhd.com appeals to the individual consumer rather than business clients so a separate web site and business name was needed to prevent detraction from my core business.