Should you diversify your income?

We’ve all heard of the expression – don’t put all your eggs in one basket. It’s a valid expression with merit. If you earn all your income from just one source and that goes away, then it’s highly likely that your organisation will go away too. So does that mean you should diversify your income? Not necessarily.

Before we jump into whether or not you should diversify the income of your organisation, we should cover what diversification of income is.

Income can be diversified in two ways

1 Different providers of the income

These are the actual people and organisations who hand over their money to your organisation. The two extremes here would be one customer vs thousands of customers. It worth noting that we are talking about people and organisations that provide income to your organisation and as such this includes grants and donations. Another way to look at this may be one annual grant vs 20 annual grants.

2 Diversification through multiple products and/or services

Yes, multiple products will usually lead to a more diverse set of customers as described above, however multiple products can also diversify a single organisation that provides income to your organisation. For example, a  larger organisation that has multiple needs may buy a range of products and services from you.

In order to have sufficiently diverse income, your organisation must receive income from multiple sources for multiple reasons.

But does your organisation require diversified income?

The answer is actually very simple. You need to diversify your income in proportion to the level of uncertainty that your current income has.

For example, if your organisation has received a ten year government grant and that income is sufficient to achieve your social objectives then there is a strong argument that you do not need to diversify your income at all. Your income is guaranteed for the next ten years, although you will need to think ahead towards the end of the grant term.

Conversely if your organisation generates income from only one or two sources, and you can’t be certain that these sources will continue to provide income to your organisation in the near future, then you need to look at diversifying your income.

Diversification doesn’t come without its own risks

You need to think about the needs of the market and the capabilities of your organisation. Our article on market orientation might help you think through some of the market issues. From an operational perspective, if you choose to diversify your income, your organisation must be able to both offer additional products and/or services and be able to handle the additional workload. If your organisation receives new funding to provide a particular service, is your organisation equipped to be able to deliver the service and, if it is, do you have the right people to be able to deliver it?

Additional income streams may result in additional regulation requirements, operational risks and management demands, all of which may impact the entire organisation. The decision to diversify income and how much to diversify will be different for every organisation. What is the same for every organisation though is that without income an organisation cannot exist and, assuming that your social impact is still relevant, you must do everything in your power to ensure that your organisation has income today and in the future.

Dimitri Matsouliadis
Business Consultant
Email: dmatsouliadis@cbb.com.au
Phone: 1300 763 505

 

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