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Business Income Diversification

Simple Alliance, Kenya Limited


Diversification  

As a smart businessperson, you could decide to incorporate a new service or product line into your existing business model. Such diversification would shield you from potential negative scenarios in case your core concentration flops. Basically, you reduce your business’ vulnerability.    

Rationale

The reasons for diversifying your revenue sources are varied. While adopting diversity, you could be seeking to:

  • Make you cash flow better
  • Minimise your business’ financial risk   

Key Considerations

Though attractive, you need to note that a poorly planned and executed diversification initiative could unnecessarily use up your cash while delivering poor results. Worse still, the drive could steer you from your core mission. To avoid such scenarios, take into consideration several tenets, including:

  • Logicality  
  • Justifiability  
  • Avoiding superfluity
  • Timing
  • Knowledge and skills
  • Cost-benefit analysis

Let your Diversification be Logical

Your initiative needs to be reasonable. For instance, seasonality in business is a logical reason for diversification.

Ensure Admissibility in your Initiative  

The new service or product line you launch needs to be in harmony with and key to your business. If you are a vegetable supplier, you need not diversify by including hardware items into your product line. For complementarity, you could launch a fruit salad production line.   

Be Open-Minded

Although you expect success from your planned venture, you need not shy away from looking at the other extreme. If your initiative fails, how is your present business going to cope? You need to consider this scenario and thoroughly plan for it.  

Avoid Creating Excess Products via Diversification

Product surpluses only tie your operating cash. Moreover, in case products go bad, you experience losses. Proper forecasting and planning will help you avoid such disheartening possibilities.      

Proper Timing

Ensure that your diversification drive does not coincide with your core business’ critical time. This way, you will ensure that the diversification does not take up time that you could have invested in managing the key business.

Conduct a Cost-Benefit Examination

From this study, you will determine the planned venture’s expected returns in relation to any harms it could inflict on your existing business. The catch is that the demerits should be cancelled out by the benefits you anticipate from the proposed undertaking.    

Necessary Knowledge and Skills

Before launching your diversified product, ensure that you have the requisite familiarity and expertise in the proposed venture. Otherwise, you could face serious operational and managerial dilemmas.   

Possible Diversification Alternatives

Depending on your type of business, your cash outlay, and your expectations, you can launch several diversification initiatives. You could:

  • Launch a new, distinct service or product    
  • Launch a new allied service or product
  • Use your website for online advertising
  • Adopt existing technology or products
  • Sell services of products that offer competition to your customers or suppliers 

Diversification is a strategy that could shore up your cash reserves during periods of slow business. Through diversification, you shield your business from vulnerabilities arising from possible cash crises. Your diversification drives need to be guided by sound principles. You need to carefully analyse the cost, risks, benefits, resource needs, and timing parameters of your anticipated diversification. If you are in the clear, go ahead and roll out your diversification initiative. Otherwise, discard the idea. Some alternatives you could take include: competing with your consumers or suppliers; introducing new, distinct products; launching new complementary products; or adopting existing technology or products.

Copyright (C) 2016, Simple Alliance Kenya Limited

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