Are You Thinking This Way With Your Small Business?
Manage Risk + Grow Steadily =A Successful Company
Before we dive in head first let’s make sure we’re on the same page…
The following post is in terms of small businesses that are owner operated and privately owned. I’m not describing to you the philosophy of a start up tech company that needs to grow fast and be sold off to earn a quick profit for investors and the founders. Although, I would suggest it’s smart for them to think as much about protecting their ideas and patents as they do about how to monetize and scale their product. That’s a different topic though…
A huge component to the success of entrepreneurs is their ability to think objectively, rationally, and strategically.
Why wouldn’t they do that?
Doesn’t that sound simple and make sense?
When you’re in the trenches running your company you’re often times blind to new opportunities, inefficiencies, and unnecessary risks. A great approach and mindset is to think of your company the same way you’d think of an investment. As a former financial adviser it’s a little more natural for me to think in these terms. However, with the right fundamentals, any entrepreneur or business owner can think of their business similarly.
Of course, your company isn’t a stock, bond, or mutual fund. Your company will, however, need to perform like a mixture of these investments to create a consistent, dependable, and profitable long term gain for yourself. Exactly like an investment should!
To create a strong wealth portfolio takes patience, research, discipline, and forward thinking. Your company needs to do the same.
Just because you currently consider your business to be successful does not mean it will remain that way on it’s own. There needs to be constant forward thinking, networking, and vision. I work with sports industry professionals who run their own businesses and when introduced to Parkview Sports Group say, “I think we’re all set right now”.
What are you all set with? I’m not really sure what that even means!
Are you saying you literally don’t need to think about your business anymore?
You’re earning a living you’re comfortable with and can foresee continued growth?
You’ve worked with or are currently working with someone that is helping you brand, market, streamline, and provide you objective advice?
The answer to those questions when asked, as you can imagine, most times is along the lines of, “Oh, well no, I’ve never worked with an outside consultant before, or we definitely don’t make enough money or I think about my business constantly!”
To help make sure entrepreneurs and business owners are “All set”, here is a list of great investing techniques that when applied to your own company can yield dividends!
Emerging Markets (Seek out new opportunities)
Similar to what a mutual fund manager does on a regular basis in terms of who they invest with, entrepreneurs need to seek out and find new opportunities for their companies to benefit from as well. They need to think of adding revenue streams, partnering with experts in different areas, and developing relationships with other companies they can add value to and vice verse. Too many small business owners keep to themselves. They do not spend the proper amount of time seeking out new people, products, and services to help them grow over the long term. They spend too much time worrying about what a “competitor” is doing instead of focusing on growing their own company first! Start thinking 1, 3, 5 years down the road. Not specifics, general thoughts…
Where is the market headed?
What will successful companies need to be doing by then?
Where will clients come from?
Why will you still be a leader in your industry?
How can you lower your costs in the future?
These are important questions that do not require much, if any, math to solve, so you can’t answer them unless you’re thinking about new opportunities regularly. No matter how “All set” you are, you still need to be thinking about those questions.
Diversification (Have several successful ways to make money)
Just like you wouldn’t put all your retirement money into one stock or bond, you shouldn’t run your business that way either. Multiple revenue streams are the best way to head off any sudden downturns in your business. There should be no revenue stream that a company relies on so heavily that if it takes a dramatic hit tomorrow there would be serious financial trouble. Small businesses that develop a very specific niche run the risk of being highly leveraged.
This might be a client, product, or service that make up the majority of revenue for a company. In the sports training industry we see companies go under all the time due to lack of diversity. We’ve seen baseball facilities that only target elite players and neglect softball players or recreational players that could add huge revenue streams to their niche business. We’ve seen yoga studios where their main revenue comes from the owners classes and can’t seem to attract other quality instructors to keep a steady flow of revenue coming in. These are just two examples of what it means to not be diversified in business that we see with a huge range of businesses in our industry. Both of these examples would stand to benefit from several demographics of clients spending money in a range of services like private lessons, workshops, apparel, and memberships to diversify their revenue streams. Taking this approach limits the amount of risk a small business owner faces and allows for the company to be viable over the long term.
Revenue Allocation (No one revenue stream should make up the majority of income)
In order to make sure you aren’t highly leveraged or spread too thin, entrepreneurs and small business owners need to keep track of how they make their money and from where. Yes, diversification is the first step, but allocation is just as important and where many entrepreneurs fail to plan ahead. As a company you may have started off offering 5 different services to choose from which would be a great way to get started. Plenty of options but nothing too overwhelming and difficult to manage.
For our sports facility clients, private training, group training, rentals, memberships, and camps would be solid examples of how to be diversified in generating revenue. However, without actively monitoring how you’re allocated can lead to unimaginable consequences. For example, let’s say you own a sports training company of some sort. Your company offers the same 5 revenue streams over a stretch of 3 years without changing them much. In year one you are in a solid position and not spread too thin or highly leveraged. However, as you grow and expand your total revenue by the end of year 3 is broken down as:
Out of 100%:
- Private lessons 10%
- Memberships 10%
- Group lessons 20%
- Camps 10%
- Rentals 50%
Your company stands to take a major hit if there is a competitor that has similar space available and can beat your prices. Similarly, what about the issue of how much your best client makes up of the rental income? What if you only have 20 rental clients and 1 makes up 75% of the total rental revenue? All your competitor needs to do is develop a relationship with your best client and offer incentives to use their facility. If rentals make up 50% of your revenue with 1 client making up 75% of that, then you’ll have to quickly try and increase lessons, memberships, and camps to make up for this unforeseen downturn. You might be able to do that over time, but there will absolutely be a rough patch that many small businesses just can’t seem to overcome. By taking a look objectively every 6 months, you might have seen your rentals taking up too much of your revenue allocation and found ways to convert more of those rentals into lessons and memberships instead of just being happy that rentals were doing so well. This sort of foresight is very difficult when the cash register is ringing!
Value Over Potential Big Profits (Aim for consistent growth instead of big sales)
For companies looking to be profitable over the long term it’s important they do it with the right mindset. If you’ve ever been in sales, you know that going after the “whale” isn’t the best approach. Focusing on the majority of the market and occasionally finding a big client is the right way to be successful over the long haul. Of course you will run into a big client, but they are few and far between.
As an example, the sports facility that tries to land the biggest clients who rent the most space might get lucky and close the deal. However, that one client will not cover the fixed expenses, just a large portion. So it’s the consistent sales from the larger market that will lead that facility to success. Sure, the “whale” will help. But if you go fishing for a whale you probably have a better chance of catching something else first. Just be happy with that over and over again, the whale will come eventually.
Investing Fundamentals Can Change Your Company Immediately
Thinking strategically about your company is very difficult. When we work with clients, we call it “Blind Spot Analysis”. Very simply put, when you’re driving on the highway by yourself there’s no way for you to see everything from every angle. Having someone in the passenger seat can help you avoid an accident. Similarly, entrepreneurs and small business owners have blind spots. When you’re in the drivers seat leading and running your company without an outside partner looking out for you, it’s important to take the above approach when analyzing your company by yourself.
Remember, seek new opportunities, limit exposure to risks you cannot see yet, search for value over quick gains, and don’t over leverage your company in any one area or client. Thinking of your company as an investment might just be what your company needed all along!
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Tim Ziakas is a Sports Facility Consultant who specializes in helping sports facility owners run growing, viable, and profitable companies. He is one of the only Sports Facility Consultants who has real life experience purchasing, operating, growing, and selling sports facilities and sports training companies. His leadership and sales training stems from real life experiences both in the financial services industry and sports facility industry.