Diversify to Manage Business Risk
Risk management requires learning how to properly diversify your business model.
Don't Bet Everything on One Thing
We’ve all heard the saying that “You shouldn’t put all your eggs in one basket.” The same can be said about betting everything on one major product or service line or relying too heavily on a small group of clients. Just as
diversification is essential to managing financial
investment risk,
business leaders need to hedge their bets and
manage their financial vulnerabilities. This doesn’t mean you venture into markets or embrace technologies you don’t understand, but instead, you look at what you are already doing and identify natural market synergies and
product line extensions. Additionally, it is best to stay ahead of the curve on
market trends and changes rather than lagging behind them.
Balancing Growth and Cash Flow
There is no perfect diversification strategy. It is more of an art than a science. The
key is to protect your margins and stabilize your cash flow while expanding your top line. For example, you may have some parts of the business that are in a fast-growth mode and burn through cash. In this case, it would be helpful to have other areas of the company grow more incrementally, generating surplus cash flow and steady margins. You may also have become too dependent
on one client and need a marketing strategy that encourages you to identify multiple new prospects with the potential to grow with you in the same way. You may have penetrated one market as much as you can and need to expand to other geographies.
Never rest on your marketing laurels or get too
complacent.
I realize that business size does come into play here. However, regardless of how big you are, don’t become a “one-trick pony.” Anticipate that your business will experience ups and downs, and then think of creative ways to smooth out this curve. All successful leaders understand and embrace the importance of diversification. To the greatest degree possible, put your fate in your own hands instead of being subject to the vagaries of the marketplace. Be proactive
in managing your business risks and diversify.
