Is it possible to grow your business without increasing your risk? All businesses must anticipate the needs of customers, and customer needs will change from time to time. This makes forecasting an art, not a science, no matter how scientific you make it. What today seems like a sensible route to growth, may prove tomorrow to be a dead end. With your existing business, you want to nurture and preserve what you already have, explore ways to make it bigger and better, but without taking unnecessary or disproportionate chances. During an economic downturn, every business faces greater risks. Your small business may be healthy, but the insolvency of one customer may put a fatal hole into your cashflows. You may win a great new contract, but the failure of a supplier makes it impossible to deliver. How can you be positive about growth, without endangering what you have already? Here are a few ideas I have seen small businesses use in practice.
Sell a Little to a Lot
No business needs to be profitable to survive. It just needs to break even in the long run. Increasing the number of customers reduces how much the business depends on any existing customer. That way, if one customer has problems paying or cancels their long-standing order, the cash will still be flowing in from other customers, keeping your business solvent. If you know a rival business has a particularly good customer, try to turn that customer into your customer, even if it is just on a small scale. Aggressively target new customers by offering them introductory offers that are close to the lowest price you can afford: the marginal cost. Calculate the marginal cost by determining how much it costs your business to produce or supply one extra unit, assuming that everything else is unchanged. Add a percentage to reflect the risk that the new customer may not pay, depending on whether you give credit, ask for a deposit, and what you know about how financially solid they are. Then offer that price to selected new customers, either for a limited time or for a limited volume of sales. Be discrete and personal in making the offer; you want the new customer to feel special and you do not want to upset existing customers who are happy to pay the going rate. The new customers may not be the best customers, but they will diversify the customer base and keep cash flowing through the business. Some of them may take the offer and nothing else, but others will make follow-on sales, driving growth and profits. The most important thing is to give prospective customers a good reason to try your business, at a time when most of them will be especially price-sensitive. However, keep the offer within strict limits, as you want to give them an incentive to try your business, but not to undermine your profit margin in the long run.
Fingers in Many Pies
Diversifying your product range may seem like a risky thing to do, especially if the existing range is relatively successful. However, nobody knows for sure which products will be most popular with customers in future. Experiment by trying to add new products that sit outside of your normal core offering, and see if they are popular. Plan to offer them for only a fixed period and budget accordingly. This ensures you do not waste money on a long-term commitment to a failure that will sap your business, and gives a defined period for reviewing the returns you generated from your experiment. Taking a provisional approach will reduce profits, but reduces the downside risks too. If the new products are successful, you can always revise your approach and make them a permanent addition to your range.
To broaden your range with the least outlay, be open to becoming a reseller of somebody else’s products. Look for suppliers of products related to your own, that would also be of interest to your customers. Add them to your portfolio of offerings if you can find marketing or sales synergies, but be careful to avoid picking a supplier that is also a competitor with other products you make.
Avoid becoming over-dependent on a single supplier by sourcing from its closest rivals as well. Sourcing from several suppliers may reduce margins, but it reduces risks too. If a supplier lets you down, you have a better chance of keeping your business running smoothly if you can turn to alternate suppliers you already have a relationship with. In addition, using several suppliers ensures you can immediately take advantage when a supplier gets a lead on its competitors with an imaginative new product or an aggressive cut in prices.
Commitment is a Two-Way Street
Despite the advantages of diversifying your customer base or your suppliers, sometimes business relationships need to be exclusive to be profitable. Exclusive deals, whether with a customer or a supplier, effectively makes your business a vital component of their business, so you need to bargain for a fair return that reflects the commitment you have made. Ways to do that include: guaranteed minimum orders or expenditure; clear financial penalties for failing to satisfy contract obligations; advances and payment in instalments to help you manage cashflows for long-term deals; and break clauses at pre-defined dates or if other commitments are not satisfied. Many businesses will reduce their risk by trying to push risk on to their suppliers or customers; make sure your business is not taking on that risk without putting safeguards in place. Just as importantly, ensure the rewards for exclusivity are shared with your business, and that your business partners want to succeed through a mutually beneficial relationship. The best way to do that is to get to know them and their plans. If they really want both businesses to prosper, they will have nothing to hide.
Separate the New and the Old
Any new venture can fail. Insulate an existing and successful business by keeping it separate from any new enterprise you undertake. Although it will increase the running costs and overheads, setting up your new enterprise as a legally distinct corporate entity will mean your old business will not be dragged under if your new business fails to survive. The new business can still be based on the same acumen and market awareness you obtained from running your old business, and they can buy and sell to each other. It is also possible for the old business to provide guarantees that will encourage prospective customers to have confidence and sign contracts with your new venture.
The Forgotten Asset?
In a small business, the brain behind the business will often be its biggest asset. Your knowledge, experience and wisdom are invaluable. Can you find ways to sell them and create an additional revenue stream? Many small businessmen also find it lucrative to sell their knowledge as a consultant or business advisor, especially if they work in a sector that is very specialized. You may not want to sell your knowledge to rivals, but offering to run a workshop for a customer may a natural follow-on to supplying your products or training them on how to use them. Because there is little or no outlay, there may be a lot of competition for this kind of work, and it tends to be irregular, but the advantage for you is that it can be very profitable when the opportunity does arise. Finding such opportunities may just involve keeping an open-mind as you network with prospective business partners and customers. Do not be shy about saying how successful your business is, and be enthusiastic when listening to others talk about their business, and you may be surprised at what additional revenue you can generate. Try to generate a sixth sense about where to draw the line between giving somebody some friendly informal tips and where you can start charging for high-quality advice or market intelligence. Any time spent consulting is also likely to enhance the mainstream sales of your company, even if you avoid the understandable temptation to promote those sales directly. In fact, the more relaxed you are about sales, and the better you are at sharing useful knowledge, the more sales you are likely to make.
Always Some Risk
You can never eliminate risk entirely, so any plans for growth will involve some potential downsides if they fail. The trick for you, as a businessman, is to identify those growth options that involve long-term risk to the business. Manage growth of your business like you would manage an investment portfolio: spread the risk and invest most in the areas you understand best. Do not try to eliminate risk completely, but understand what is a fair return and ask for it. In the final reckoning, no matter how much you would like to grow, be prepared to sometimes say “no” to deals or ventures where the risk is too high given the current market conditions. If nothing is ventured, nothing is gained, but always keep enough in reserve that even if you lose today, you can keep coming back tomorrow.
Eric is a blogger, podcaster, business consultant, chartered accountant and has a masters degree in Information Systems. Eric has been a consultant for over 10 years, giving data integrity advice to telcos and new media consulting to small business.