Small Business Tips: Multiple Streams of Income Strategies Pros and Cons
Diversification can be key to creating a sustainable business for an organization of any size, including small businesses. This is sometimes referred to as "Multiple Streams of Income." As with any other business strategy, multiple income stream strategies have pros and cons that need to seriously be considered.
What Are Multiple Streams of Income?
Multiple streams of income can sometimes be referred to as "profit centers" if the income comes into and through the same business. Essentially, these streams then operate as different product or service areas, all operating under one company umbrella. Example: In my business, I have three distinct streams of income: 1) Self publishing; 2) Book sales; and, 3) Public speaking. Yet, I have not set up three separate companies.
In other cases, streams are completely separate businesses or investments, all owned (either in whole or in part) by one organization or individual.
The strongest reason for using a multiple streams of income business strategy is that when one part of the business hits a sales slump or is seasonally slow, these secondary revenue sources can help make up for the loss. This can create a steadier income picture through the year and may help avoid borrowing for regularly occurring expenses such as labor, utilities and rent.
In addition to seasonal or temporary fluctuations in income, these strategies can help keep a business in business should one or more of the profit centers completely dry up due to economic, consumer preference and technological changes.
Sometimes growth or expansion into new markets can drain resources, too. Keeping the business afloat with multiple or secondary profit centers can help propel the overall organization to new success.
As well, investing in profit centers that are similar to or relate to the primary business can provide economies of scale and synergies that capitalize on the company's strengths and access to customer bases.
While having the safety net of additional income sources can help sustain or build a business, it can also kill a business quickly if one or more of these centers cause too much of a drag on overall resources. This can create a "Robbing Peter to Pay Paul" scenario. If only overall revenues are considered when evaluating financial results, this situation is more likely to occur, masking individual revenue stream troubles.
Monitoring multiple revenue streams can be time-consuming and confusing if effective and efficient systems are not set up for reporting. Example: In my business with three income streams, I needed the help of an outside bookkeeper to set up special reports in my accounting software package to properly evaluate revenues, expenses and profits. This took some time and expense because one of the businesses is retail-based, requires sales tax reporting and has a separate e-commerce system that didn't integrate with the software. Even with that help, it still required some more complicated Excel spreadsheets to get the insight I wanted.
From a marketing perspective, multiple offerings can confuse a company's core message and branding, leading customers to question, "So who and what are you today?"
Real Life Example: Multiple "Slurry" of Income
Several years ago, being "green" was all the rage. And I jumped on that wagon almost instantly by offering more eco-friendly promotional products. I believed in the greener business agenda and it helped build my status as a green marketing expert which was great.
But it also drew a lot of people to me that wanted me to rep their "green" consumer products, reasoning that I already had an established network who knew, liked and trusted me and would be interested in what I have to say. In theory, that sounded like a good idea since it aligned with my personal and professional values. Key phrase here is "in theory." It was a disaster, resulting in losing clients, losing focus and some money, too. It wasn't an income stream; it was a slurry!
What was wrong with this multiple stream of income plan?
Because I sold to the B2B (business to business) market, selling B2C (business to consumer) goods was a horrendous fit. Even though I have many personal friendships with clients, they weren't exactly thrilled about discussing a greener consumer product with me. It made my sales conversations chaotic and even uncomfortable. Adding to the mess was that many of my clients had mixed feelings about greener initiatives.
I wish I could say that was the only instance where I tried the B2B plus B2C mixture, but it wasn't. And every time I wandered into this mismatch of markets, I was reminded why I shouldn't do it.
Luckily, I've learned my lesson over the years and strongly scrutinize every additional income opportunity.
Tips for Using Multiple Streams of Income More Successfully
- Choose Logical Additional Income Streams and Profit Centers. Sure, mega entrepreneurs such as Richard Branson can invest in profit centers and businesses as diverse as music to space travel. But it is unlikely that most businesses and small business owners are in that elite group. Choose opportunities that provide economies of scale and synergies between income streams to capitalize on assets and strengths.
- Run Separate Financial Reports for Each Profit Center or Business. To avoid the "Robbing Peter to Pay Paul" scenario, run separate financial reports for each stream of income. Direct expenses and COGS (Cost of Good Sold) for that stream need to be included. Also, each stream should "contribute" to overhead for the entire operation to avoid having one stream drag the organization into an unprofitable state. Consult a CPA or bookkeeping professional to determine contribution percentages for each center.
- Decide on Acceptable Limits for One Profit Center's Drag on Overall Finances. Especially when using multiple streams of income to fuel new growth or get through a rough patch, a point where the high investment opportunity's drag on the overall financial health becomes unacceptable needs to be established. When getting close to that point, it is a warning sign that action and decisions must be taken to keep financially healthy.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2015 Heidi Thorne