Diversification – Spreading those eggs

Small Business Advice Comments Off

Many small to medium sized businesses will colloquially have “all their eggs in the one basket”, with either a limited product range or typically with just a few customers.

But is this a bad thing?  Investment advisors often tell us that we need to diversify to spread our risk by placing our eggs in multiple baskets, rather than just the one.

What is most important is to understand the risks involved, which may include asking yourself some of the following questions, amongst others:

 

  • If we lose the account, can the business quickly pick-up alternative custom?  How long could the business survive between losing the account and gaining another?
  • Does the business have an understanding of the impact of a product recall, including any cost recovery from the client, and how it would deal with this?
  • What is the opportunity cost of not diversifying?  Eg. Brand, extended product range etc.
  • Do we have the capacity to diversify in terms of production ability, service capability, administrative capability, available capital?
  • Is there a risk of the product or service becoming obsolete or stagnating? Eg. a franchise of tanning bed salons.
  • Are there any legal or compliance issues that could impact the product or service?  Eg. If you are a cage egg seller and your biggest customer has gone cage free, or you provide financial services for which you now require certification that you don’t have.

 

In a business with little diversification it will be necessary to assess the risks involved and have an action plan in place to address them or to mitigate the risks.  I will be critical to maintain customer relationships and possess a leader who can ensure that their finger is always on the pulse with regard to the market and their position within it.

About Wendy Cavarra

Wendy Cavarra
Wendy is the principal at Anovas Business Advisory. She has had 10+ years experience in the accounting and finance industry. Add her to your Google+ Circles .

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