Overview
Small businesses often grapple with the challenge of maintaining consistent revenue streams. The feast or famine cycle, characterized by irregular income patterns, can impede growth and stability. Adopting a strategic approach is important for small businesses to mitigate the effects of this cycle and stay sustainable. Feast or famine cycles happen when small businesses experience alternating periods of high demand and revenue abundance (feast) followed by periods of scarcity and financial strain (famine). Several factors contribute to this phenomenon, including seasonal fluctuations, market volatility, and under-and over-pricing, and most commonly, overreliance on large customers.
The following chart highlights the difficulty of running a feast or famine business. The fixed cost structure (overhead) of the business is built to support the peak business times, however, when business is slow fixed costs remain, and the company has periods of losses. Over the course of the year, the company’s profitability is greatly impaired by losses incurred during the slow periods. Fixed costs cannot be reduced because they are essential to support the busy periods.
One way to manage these cycles is to make fixed costs variable by utilizing subcontractors, however, this comes at a greater cost and with the potential for lower quality.
Combatting Feast or Famine Cycles:
To counteract the feast or famine cycle, businesses must adopt proactive measures aligned with their strategy:
Diversify Customers: Reduce reliance on key sources of revenue by adding new customers through product expansion, new service offerings, strategic partnerships, or geographic expansion. Spreading revenue across multiple sources to manage vulnerability to market fluctuations is important.
Recurring Revenue: It is important to develop recurring revenue streams to support continued operations. When large projects or orders are added over and above a recurring base, the profitability of the company spikes along with the surge in work rather than just covering overhead.
Focus on Customer Retention: Prioritize customer satisfaction and retention efforts to foster long-term relationships and recurring revenue streams. Offer value-added services, personalized experiences, and loyalty incentives to incentivize repeat purchases and mitigate revenue volatility.
Maintain Financial Reserves: During periods off east, set aside surplus revenue as financial reserves to cushion against future downturns and mitigate the impact of famine.
Large Project vs. Small Project Focus:
Large Project Focus: Many companies spend their marketing efforts on winning large projects which generally have much larger profits than smaller projects. The result is that the company risks looking for large projects and having downtime in between.
Small Project Focus: A company focus on creating a pipeline of small projects can keep the firm at a stable level of revenue. Small projects are often much easier to manage and have less unforeseen costs associated with them. However, there must be many small projects running at once and they must have a recurring component.
It is challenging to run a company with a focus on large projects, small projects, and recurring work, but maintaining a base of all three can provide stable revenue and a feeder for employee training and larger projects.
Summary
Creating profitable products that support a business year-round is a crucial step for success. While there is an appeal to focusing on large high-revenue projects, it is best to find the balance between these and small projects, which provide the firm with predictability. It is important to generate revenue from multiple sources which do not follow the same seasonal or market cycles. Because most businesses grow through the acquisition of large new clients/projects or through participation in a growing market, diversification of revenue sources does not happen naturally, therefore, this must be a continuous strategic focus of the company.
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