Whether you’re setting up a business plan for a new business venture or are compiling a business development plan for an existing business it’s important to undertake a SWOT analysis. Part of a SWOT analysis is to minimise weaknesses in a business and one thing that is overlooked is how diverse the business is.
An example of how a lack of diversification can affect a business is looking at the current global climate, in particular China’s actions that are impacting Australia’s barley and beef industries. If one major customer decides to be difficult the impact can really hit home.
Although diversification does not guarantee you won’t experience a loss, it is certainly one of the most important components of a successful business reaching long-range financial goals and ensuring risk is minimised.
Why Business Diversification is Crucial to Success
I’m sure most of you have had a grandmother or some other elder in the family tell you that you shouldn’t ‘put all your eggs in one basket’, before you dismiss this old saying let me remind you that the likes of Warren Buffett have also been known to say exactly the same.
It is a sound philosophy applied in business, as well as the finance and investment industries in order to reduce risk. Balance within your clients is a key to success.
Seasonally, globally and market choices can all affect our businesses (big or small) so be aware of how all of these things can affect you. If you have a business that is very seasonal, think of how you can diversify in the ‘off season’. For example lawn mowing is busier during the summer months so you could look at what other garden related jobs are needed to be done in the winter months and offer them.
Sourcing all of your goods from one particular country, area etc can also cause supply problems – this has become quite evident during recent times. Making sure you diversify your supply chain will keep you ahead of your competitors should any problems arise. In recent years when there was flooding throughout Queensland there was a problem with the supply of salt to pool shops for everyone’s pools. One of the local shops here in the Redlands had always purchased it’s salt from two different places one in Queensland (which was unable to supply the salt at this time) and one in Victoria. Other local stores had relied on the Queensland suppliers, this particular shop had a much better supply of salt as they had an existing, on-going relationship with the Victorian company.
You also need to keep track of what consumers want and be in a position to diversify. When McDonalds first started their global expansion in the 1980s I really don’t think we would have expected them to start selling salads. They were constantly listening to the market, however and positioned themselves so that they could offer salads to their clients as well, helping them to retain their market share.
Problems with Diversification
Now the pros of being a diverse business totally outweigh the cons, but there are definitely pitfalls you should be aware of.
One big pitfall could be brand damage. It is important that you stay on brand for example if you visited a Taco Bell you wouldn’t want to see spring rolls on the menu as you want Mexican food not Chinese. If you are known for one thing you need to make sure that when you diversify it won’t dilute your brand too much.
If you don’t diversify in the right way people can perceive that you are a ‘Jack of all trades’ and not actually an expert in any.
There can also be more operation and/or admin costs involved when you diversify, although the continuity of cashflow should more than make up for this.
How Can I Diversify?
The first step is to do a risk assessment of your business and then discuss with key personnel in your business different ways in which you can diversify. When you have a few ideas then discussing them with your business advisor or accountant is a great idea.
Look at what needs to change and how you can implement these changes going forward, for example you may already have a client that makes up 40% of your income in which case you need to decide if you’re going to reduce what you do for that client and increase other clients or if you are going to ramp up your business so that the % naturally drops to an amount you’re happy to accept.
You need to set a clear policy within your business (and make sure that your team both know and follow this policy) to say that no single client shall represent more than X% of total turnover. Think hard about the percentage and choose one that you could still operate profitably with whether that’s 10% or 20% you need to decide. If you’re not sure then your business accountant can go over the numbers with you and give you some constructive advice on this.
If you have any questions about this article or want to talk to someone about diversifying your business please contact one of our experienced accountants on 3826 6111.