Managing Income Streams & Your Customer Base for Profit
1. Defining Income Streams and your Customer Base Income Streams are different types of Income reported and recorded in your Profit & Loss. For example, Project Work, Maintenance Work, Commercial, Residential etc.
Your Customer Base is the number of unique customers you do business with in a given financial year, their average dollar sales, number of transactions and type of income stream they belong to.
2. How do they impact your financial position and profit?
Let’s tackle Income Streams first:
a) Income Streams should be grouped by what I call ‘Predictable Gross Margins’ and should be similar styles of work, for example, ‘Residential Renovations’ is a typical Income Stream for Builders, or ‘Commercial Maintenance’ maybe another Income Stream
b) They should be categorised this way so you can easily monitor Gross Margins and Gross Profit, if you have an Income Stream with multiple Gross Margins it will be difficult to ascertain how you are performing due to a combination of margins
c) Additionally, with similar types of work, they will share a common customer, e.g., ‘Commercial Maintenance’ clients are a completely different target market to ‘Residential Renovations’, not only from a margin point of view, but also a Marketing and delivery of Product point of view
d) Finally, easiest way to think of Income Streams is to think of each one as its own ‘micro-business’ within your overall business
OK, let’s look at your Customer Base:
a) Your Customer Base is simply the number of unique customers your company does business with in a given year, across each of your Income Streams
b) Some things to very carefully consider when assessing your Business Model, Income Streams and ultimately your Customer Base:
a. If you have a small number of clients that make up your overall Annual Sales, your business may be very prone to sudden losses in Revenue if one or more of those customers decides to go elsewhere
b. Keep an eye on what % of overall Sales customers contribute, if any are 10% or more, bear in mind, if they leave, that’s 10% or more of your revenue gone instantly
c. Try to limit the downside and optimise the upside, if you can structure your business model so you have a large number of customers that contribute to your overall sales, the likelihood of losing a large % of revenue is reduced as it is spread across a wider mix of customers. In terms of optimising the upside, consider positioning your business to be able to handle larger client projects on a short term basis in your business through subbies, so essentially, the large project work is not in your budget but if it comes along you can consider doing the work and treat the gross profit as cream. Just make sure you can truly handle the extra work temporarily
d. Each unique Income Stream within your business will usually be a different target market or at least have very different needs and wants within a target market which will require tailored marketing and offerings for each Stream as well as specific abilities to deliver the work involved
To summarise, two key thoughts to consider:
1) Each Income Stream in your business usually has its own set of requirements across your business which requires your business to be disciplined in more areas, not done correctly this can cause confusion and overall may affect the quality in all areas
2) A small customer base may be great from an administration point of view, however, it can leave you exposed to sudden drops in revenue. Likewise, a very large mix of customers is ideal as it protects your downside, however, you’ll need to be prepared to handle a much higher volume of administration and associated work
Finally, I have mentioned this in most of my finance blogs, it is imperative you have an excellent working relationship with your accountant. If your accountant is simply doing regular compliance work for you at the moment and offering nothing else, then it’s probably worth finding a firm that can provide real strategic solutions as you grow. As a business coach, one of the first items I discuss with clients is what their relationship with their accountant is like and if they need help, I have a wide range of accounting firms who are part of my affiliates network I can refer to if needed.
Eric J. Gregory is the Author of ‘Would you like Profits with that?’ and the founder of Gregory Business & Trades Coaching which specialises in working with SME Business Owners and Entrepreneurs to ‘Create Quality Lifestyles through Business Success’.