The strength of a small business is to adapt and move quickly to changing circumstances. One of the most common weaknesses I see in business is the lack of income diversification. The average small business owner is an expert in his/her industry and therein lies the trap.

Once a small business begins to be successful in a specific market there is a tendency to become so preoccupied running the business the amount of income from one major customer, market segment, or product type exposes the business to interruptions in cash flow.

Interruptions to cash flow can be caused by:

• recession
• Major disaster or terrorist event
• Major customer closing
• Customer changing suppliers
• Industry slowdown
• Store access diverted by major road construction
• Competitor moving into neighborhood
• Employee fraud, embezzlement

Whatever the cause, the impact can range from a short-term cash shortage to a severe interruption - the impact can make the most stalwart entrepreneur frightened.

Diversify Your Source of Income

Your best strategy is to find new source(s) of income so as to insulate your business from the effects of a major cash flow interruption.

• Diversify source income by adding new products and services. Do you service what you sell? A service department can add substantial profits to help a business to ride out the effects of a recession.
• Diversify your customer base by developing new markets. Locating a branch operation in a new geographic location (suburban, rural, downtown) allows one operation to supplement the other.
• Reduce risk by getting more customers and the smaller the better, because it is always easier to replace a few small customers than one large customer.

Every diversification strategy takes time to implement. The best time to diversify is when you are flush with cash and feel like you do not need it because by the time you realize you need to look for new sources of income - it might be too late.