Diversification of Income Sources Protects Your Business
I knew things had gone from bad to worse the night I went through a McDonald’s drive-thru at 9 p.m. and had my food delivered by a well-groomed 50-year-old.
That was 10 years ago, when catastrophe struck the area where I lived. A flood, you ask? A tornado or earthquake?
No, the catastrophe was that people quit buying recreational vehicles.
This was at the very beginning of the Great Recession, and the first thing people did was cut out luxury items, like RVs. While this might not seem like a catastrophic event to most people, it was the equivalent of Hurricane Katrina in Elkhart County, Indiana — the vast majority of RVs in this country were manufactured there.
RV manufacturing is such a huge industry there that its fingers reach into all areas of the county. Many small businesses sprung up for the sole purpose of supplying various parts for the industry. Other businesses started to supply the RV parts suppliers. Many other businesses relied on the income of the RV factory workers to buy their products.
By late 2008, the entire economy of the county collapsed, and the county sported a 30% unemployment rate at one time, although many more essentially became part-time workers. The underemployment rate probably exceeded 50%.
Many of my clients — and the county as a whole — learned the dangers of putting all your eggs in one basket. For several business owners I knew, RV factories made up 75 to 100% of their client list. In the preceding years, when the economy was soaring, they were riding the gravy train.
But by 2009, their shops were collecting cobwebs — and with such a high unemployment rate, they weren’t finding work anywhere else. Even the fast food joints, usually begging for help, weren’t taking applications because they had hundreds of applications on file — many of them from unemployed 50-year-olds willing to do almost anything.
I fortunately avoided having to submit an application to the Golden Arches. Even though I only had a few occasional RV clients, my business flatlined because so many of my clients relied either directly or indirectly on money coming out of the RV industry. I picked up occasional jobs here and there from the few businesses that weren’t affected by the RV collapse, I tightened my belt and, thanks to having a diversified clientele, managed to make it through.
About a year later, when things had begun to ease a bit and the RV factories slowly began production again, one of those business owners — who had produced 75% of his product for just one RV manufacturer — vowed that he would never again tie up more than 25% of his production for any one client.
When you’re in a service industry or a supply business, and you do good work, you may find yourself in a similar position, where one big business or institution requires more and more from your business. The money is good and easy — almost like receiving a paycheck from that company.
But if that business collapses, changes how it does business or simply decides to go with a cheaper version of what you produce, you could suddenly find 50, 60 or even 75% of your income vanish overnight.
Some business experts advise having no source supplying more than 10% of your income. Others advise that if you do have one source providing 25%, then diversify the other 75% among 10 or more sources.
The reason is simple — if one company is providing 50% of your income and they leave, you’re left with half your income. If one company supplies 10% of your income and they leave, you still have 90% of your income left, and making up that missing 10% can be fairly simple with a little extra effort.
This means sometimes being in the uncomfortable position of turning down work from a good income source, but it’s still better than someday losing a lot more, including your dignity. Just ask the 50-year-old in the drive-thru window.