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Small Business Tips: Multiple Streams of Income Strategies Pros and Cons

Updated on September 17, 2015
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Heidi Thorne is an author and business speaker with over 25 years of experience in sales, marketing, advertising and public relations.

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Diversification can be key to creating a sustainable business for an organization of any size, including small business. This is sometimes referred to as "Multiple Streams of Income." As with any other business strategy, multiple income stream strategies have pros and cons that need to seriously be considered.

What are Multiple Streams of Income?

Multiple streams of income can sometimes be referred to as "profit centers" if the income comes into and through the same business. Essentially, these streams then operate as different product or service areas, all operating under one company umbrella. Example: In my business, I have three distinct streams of income: 1) Self publishing and marketing coaching and public speaking; 2) Book sales; and, 3) Imprinted promotional products. Yet, I have not set up three separate companies.

In other cases, streams are completely separate businesses or investments, all owned (either in whole or in part) by one organization or individual.

Pros

The strongest reason for using a multiple streams of income business strategy is that when one part of the business hits a sales slump or is seasonally slow, these secondary revenue sources can help make up for the loss. This can create a steadier income picture through the year and may help avoid borrowing for regularly occurring expenses such as labor, utilities and rent.

In addition to seasonal or temporary fluctuations in income, these strategies can help keep a business in business should one or more of the profit centers completely dry up due to economic, consumer preference and technological changes.

Sometimes growth or expansion into new markets can drain resources, too. Keeping the business afloat with multiple or secondary profit centers can help propel the overall organization to new success.

As well, investing in profit centers that are similar to or relate to the primary business can provide economies of scale and synergies that capitalize on the company's strengths and access to customer bases.

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Cons

While having the safety net of additional income sources can help sustain or build a business, it can also kill a business quickly if one or more of these centers cause too much of a drag on overall resources. This can create a "Robbing Peter to Pay Paul" scenario. If only overall revenues are considered when evaluating financial results, this situation is more likely to occur, masking individual revenue stream troubles.

Monitoring multiple revenue streams can be time consuming and confusing if effective and efficient systems are not set up for reporting. Example: In my business with three income streams, I needed the help of an outside bookkeeper to set up special reports in my accounting software package to properly evaluate revenues, expenses and profits. This took some time and expense because one of the businesses is retail based, requires sales tax reporting and has a separate ecommerce system that didn't integrate with the software. Even with that help, it still required some more complicated Excel spreadsheets to get the insight I wanted.

From a marketing perspective, multiple offerings can confuse a company's core message and branding, leading customers to question, "So who and what are you today?"

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Real Life Example: Multiple "Slurry" of Income

Several years ago, being "green" was all the rage. And I jumped on that wagon almost instantly by offering more eco friendly promotional products. I believed in the greener business agenda and it helped build my status as a green marketing expert which was great.

But it also drew a lot of people to me that wanted me to rep their "green" consumer products, reasoning that I already had an established network who knew, liked and trusted me and would be interested in what I have to say. In theory, that sounded like a good idea since it aligned with my personal and professional values. Key phrase here is "in theory." It was a disaster, resulting in losing clients, losing focus and some money, too. It wasn't an income stream; it was a slurry!

What was wrong with this multiple stream of income plan?

Because I sold to the B2B (business to business) market, selling B2C (business to consumer) goods was a horrendous fit. Even though I have many personal friendships with clients, they weren't exactly thrilled about discussing a greener consumer product with me. It made my sales conversations chaotic and even uncomfortable. Adding to the mess was that many of my clients had mixed feelings about greener initiatives.

Wish I could say that was the only instance where I tried the B2B plus B2C mixture, but it wasn't. And every time I wandered into this mismatch of markets, I was reminded why I shouldn't do it.

Luckily, I've learned my lesson over the years and strongly scrutinize every additional income opportunity.

Tips for Using Multiple Streams of Income More Successfully

  • Choose Logical Additional Income Streams and Profit Centers. Sure, mega entrepreneurs such as Richard Branson can invest in profit centers and businesses as diverse as music to space travel. But it is unlikely that most businesses and small business owners are in that elite group. Choose opportunities that provide economies of scale and synergies between income streams to capitalize on assets and strengths.
  • Run Separate Financial Reports for Each Profit Center or Business. To avoid the "Robbing Peter to Pay Paul" scenario, run separate financial reports for each stream of income. Direct expenses and COGS (Cost of Good Sold) for that stream need to be included. Also, each stream should "contribute" to overhead for the entire operation to avoid having one stream drag the organization into an unprofitable state. Consult a CPA or bookkeeping professional to determine contribution percentages for each center. Click here to learn how to calculate profit margin.
  • Decide on Acceptable Limits for One Profit Center's Drag on Overall Finances. Especially when using multiple streams of income to fuel new growth or get through a rough patch, a point where the high investment opportunity's drag on the overall financial health becomes unacceptable needs to be established. When getting close to that point, it is a warning sign that action and decisions must be taken to keep financially healthy.

Disclaimer: Both the publisher and author have used their best efforts in preparation of this information. No representations or warranties for its contents, either expressed or implied, are offered or allowed and both parties disclaim any implied warranties of merchantability or fitness for your particular purpose. The advice and strategies presented herein may not be suitable for you, your situation or business. Consult with a professional advisor where and when appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other damages, including but not limited to special, incidental, consequential or punitive, arising from or relating to your reliance on this information.

© 2015 Heidi Thorne

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    • purl3agony profile image

      Donna Herron 20 months ago from USA

      Another great hub with some wonderful examples of how a business might create and manage multiple sources of income. Your discussion about the need to track the income and expenses for each of your business activities separately is very helpful and something that most people might overlook. In my limited experience, we've been able to do this through Quickbooks by adding a separate code for each activity, but it is an additional step. Thanks for sharing your experience and wisdom!

    • billybuc profile image

      Bill Holland 20 months ago from Olympia, WA

      I appreciate that you always show the pros and the cons of a strategy. Thank you for that and as always, thank you for your expertise born from experience. I hope your Thursday is everything you envisioned it to be.

    • heidithorne profile image
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      Heidi Thorne 20 months ago from Chicago Area

      Yep, billybuc, it was a pretty good Thursday. So thanks for the Thursday thoughtfulness and comments. Have a great weekend ahead!

    • heidithorne profile image
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      Heidi Thorne 20 months ago from Chicago Area

      Indeed, purl3agony, it can be quite a project to tie expenses to income sources. But it is so worth the effort! Of course, you have to avoid over-analyzing and/or getting analysis paralysis. But without some of those insights, I wouldn't have been able to make some important changes in my business. Thanks so much for adding your experience to the conversation! Have a beautiful day!

    • Larry Rankin profile image

      Larry Rankin 20 months ago from Oklahoma

      Great tips!

    • heidithorne profile image
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      Heidi Thorne 20 months ago from Chicago Area

      Thanks, Larry, for the kind comment! Have a great weekend!

    • lawrence01 profile image

      Lawrence Hebb 20 months ago from Hamilton, New Zealand

      Heidi

      Some good sound advice here. My wife and I use this model with our own finances as we have a few 'income streams' from jobs and other things. By using it we've adapted it to help us save for 'big ticket items' and it really worka.

      Great advice

      Lawrence

    • heidithorne profile image
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      Heidi Thorne 19 months ago from Chicago Area

      Hi lawrence01! Glad to see that the multiple streams strategies have worked for you. But, as you no doubt can confirm, it does take a well thought out plan to achieve the benefits of it. Thanks for chiming in and for your kind comments! Have a great day!

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