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Diversification - Spreading the Risk in Business

 
Spreading the amount of risk that a business venture is exposed to through diversification is an important consideration once the initial start-up has enjoyed some measure of success.

Risk is an inherent part of starting a new business, more so in situations when the particular venture in question represents the first time the entrepreneur is attempting to go it alone.

A common mistake made by many businesses is that they begin with an initial plan, execute it and then seek to grow their sales and market share. Whilst they may be very successful at accomplishing this, they remain engaged in a single market with a limited range of products and services.

Why Spread the Risk?

One of the reasons why a business should be concerned with the levels of risk it is exposed to is that being reliant on a single market or group of similar products means that a downturn in that area can have a significant negative effect on the whole operation.

What was once a thriving, growing business becomes a white elephant overnight following a Chancellor’s Budget or some other economic event not previously identified in the SWOT analysis.

Such a sudden reduction in activity levels can have far reaching effects for the entrepreneur and catch them at a time when they were least expecting it.

They might have accepted the possibility of low sales when they first started up, but a year or more later when they are at last beginning to feel more relaxed, they may find the sudden reduction in business activity catastrophic.

Diversification is like Starting Again

A well considered business plan should contain some ideas for diversification, other areas which can be added to the initial operations once they become established.

Although the experience gained when starting the business for the first time will almost certainly be of use when engaging in other areas, the task of diversifying is essentially similar to starting again.

 Ideally, each attempt at diversification will result in a new distinct operation capable to sustaining itself and to a large or total extent, independent of any of the other businesses.

The entrepreneur will then have several distinct entities which are profitable in their own right and completely self sufficient. A downturn for one of these businesses should not therefore lead to the whole of the organisation being exposed.

One at a Time or All Together?

The question of whether it is better to start one business at a time or several together would depend on the capacity of the entrepreneur to devote the required time, financial and other resources necessary to make them a success.

Given that the spreading of risk through diversification might be a priority, where it is possible, several business ideas would ideally at least be envisaged at the beginning.

Depending on what are determined to be feasible areas that the entrepreneur could engage in, there might well be significant overlapping in resources necessary to bring them to the market.

One such area might be web design, where on the basis that each separate business will have its own website; the original specification for the web project could encompass the features which satisfy the needs of all of the different operations.

Whilst the customer facing design aspects will need to be bespoke, the functionality which exists in the administration areas could host a range of facilities with each business utilising those which are relevant to it.

In approaching the business in this manner, both time and money are ultimately saved. Even though the launch of the initial website might be delayed as extra features needed for the other businesses are added to the administration area, the deployment of these other websites for ventures number two, three and four will come soon after.

Thus the entrepreneur, in this case, will have several launches occurring in quick succession.

Another advantage of developing and starting several businesses at the same time (aside from spreading business risk through diversification) is that once one business begins to sell, resources are often then required to satisfy customer queries and orders.

For a sole owner and manager, this can represent a significant additional duty for them and thus limit the time they have to develop new business ideas and to work to bring them on-stream.

Conclusions

The focus of many starting a business is on one idea and a single market. The importance of having several distinct areas of operations so that the risk to the entrepreneur is minimised can not be overstated.

Where it is possible, a business plan should encompass a strategy to diversify the operations as soon as is possible and preferable from the beginning.

By having different income streams, the failure or significant curtailment of one can be insulated so as not to affect the overall position of the business owner.

 
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