There are many great ways to deal with the fluctuations of business revenue:
Avoid the vulnerability of having a large percentage of your business with only a few clients.
Avoid the temptation of "spreading the wealth" too quickly by increasing benefits and salaries during the high cycles of revenue and profitability. Instead, average up over time to make certain that the increased profitability is sustained. You will never be able to reduce benefits and salaries successfully.
Avoid the temptation of taking too much of the retained earnings from your company during the high cycles while under the delusion that these great times will last forever. Understand that building wealth within the company is absolutely necessary if you expect to weather the cycle of your business's downturn. Consider the increased cash balance as your personal insurance policy to battle off the vultures during times of reduced earnings.
Pursue acquisitions for the purpose of infusing cash flow or increasing market share.
Create an income source for your business through diversification.
Of these tips, the most telling indication of a successful CEO is the creation of diverse income. While acquisition is also a successful strategy for some entrepreneurs, it comes with a higher risk factor than another approach to diversification that we will refer to as "slight shifting."
Slight Shifting: What It Is, How It Works
So what is "slight shifting" as it relates to diversification of your company? It's really quite a simple concept. As you consider the area of expertise of your business, also consider the most closely aligned variations. For example, the expertise of the A.D. Morgan Corporation is the construction of commercial and public-use facilities, such as schools, jails, television and radio stations, offices, and retail facilities. Therefore, in addition to constructing new facilities, an example of one closely aligned expertise includes gaining an understanding of existing facilities that are designed for expansions and sizable renovations.
EXPLOITING EXPERTISE. How can this slight shift in focus help to create an opportunity for our company's diversification? Very simply, we identified that we were offering this service to clients who retained us for the construction of additions and renovations to their facilities. We further identified that there were many owners of commercial and institutional facilities needing this type of property evaluation to periodically catalogue the status of their investment as well as help guide their development of capital-improvement budgets.
We recognized that clients who owned and operated their properties all shared the need to have their assets reviewed on a periodic basis by a knowledgeable third-party professional, one who truly understood building systems, their "normal" life-spans, and the cost value of replacing vs. fixing building systems.
It is this type of "slight shifting" that requires very little capital expense to structure additional marketable deliverables. In this case, we were already offering an abbreviated version of this service to our clients who retained us for construction. So our shift was to expand the service and offer it to clients who want to outsource their property asset evaluations and gain an expert understanding of how best to maintain their value. Thus, with little expense, we utilized our existing expertise and refocused it for a new and diverse client base that otherwise would not be a target market for our mainstream service.
A CASE HISTORY. Another example of diversification for our construction-management firm was to construct tower sites for the wireless communication industry. Remembering our early description of our expertise, commercial construction, we have in place the management system that, when followed, produces new construction.
Several years ago, a wireless communication service provider approached us, requesting our assistance in managing the development of its wireless service network. Staying close to our model of "slight shifting," we quickly concluded that whether building new building facilities or new wireless communication facilities, we were utilizing the same construction business systems: scheduling, cost control, and quality control. Further, we would be contracting with subcontractors and mobilizing our management team to a construction site. The only difference was that we had an abbreviated construction cycle that produced a communication's site, not an occupied commercial facility. Again, with little expense, we utilized our existing expertise and re-focused it for a new and diverse client base that otherwise would not be a target market for our mainstream service.
Given these two examples of diversification that were modeled after our existing business with "slight shifting," you should be clear about how to bring diversification to your business without "taking your eye off the ball" and risking too much of your capital. Both of these examples have proven beneficial to the growth of our company, and both have served to carry some of the burden during the economically challenging times of our main business.
Rebecca Smith, 44, is founder and president of A.D. Morgan Corporation, a commercial construction company based in Tampa and Melbourne, Florida. Founded in 1989, A.D. Morgan has achieved average annual growth of 100%, reaching revenue of $54 million in 2001. It currently employs 42 people. Prior to launching her outfit, Smith worked for five years as a project manager for Brown & Root, a Houston-based subsidiary of Halliburton. Entrepreneur's Byline comes to BusinessWeek Online readers courtesy of EntreWorld.org, a resource for entrepreneurs that is sponsored by the nonprofit Ewing Marion Kauffman Foundation.