Let’s say you read my recent post about recurring revenue, and you’re all up for that plan… but are not able to sell products or services in “recurring” packages. For instance, say your customers from last month don’t need a newly sodded lawn every month or year.
But let’s also say the benefits of recurring revenue appeal to you, and you want to make the sales process less of an uphill battle, and give your business more predictability. In this and my last post, my comments are focused on a few alternatives to recurring revenue that could generate similar benefits... including Counter-Cyclical Services.
Solving the Seasonal Business Cycle
When was the last time you paid for lawn mowing services in January? Or bought a cord of firewood in July?
Unless you’re a frequent camper or live in the warmest parts of the U.S., my guess is that you’ve never done either of these things. Obviously, this is because doing so just doesn’t make sense at that time of the year. Right service, wrong timing!
You cut your lawn in the warm season. And heat your home in the cold season.
And therein lies a key “recurring revenue” problem – or management call to action! – for those of you with seasonal businesses… Like landscapers. Temperature-sensitive outdoor construction businesses. Snow removal businesses. Chimney Sweeps.
The biggest challenge I have found with such businesses is that their annual 3-6 “off” months create enormous cash flow management challenges, or the ultimate non-recurring revenue problem! Sometimes, maybe oftentimes, these problems can even cause a business to fail.
Therefore, the best survival plan for these businesses is to find a way to not have a 3-6 month gap of cash inflow at all, and to fill this gap with the sales of something else… including things that sell in their main services’ seasonal opposite.
Like landscaping services and firewood. Snow removal and pool maintenance. Or whatever warm-cold combination works best… and, ideally, can be performed with the same personnel, assets, and overhead during both seasons.
Solving the Cyclical Business Cycle
Equally troublesome for business is the business cycle itself. Recessions happen. Growth periods happen. Unfortunately, customers don’t buy the same things in the same quantities in both environments – which of course is one of the greatest business management challenges, including for construction and contracting businesses.
In the most recent economic downturn, nearly half of all construction businesses went out of business. And if you’re managing an economically-sensitive business, that’s troubling stuff! Stuff requiring you to have answers and a plan.
So, what is the answer and best plan?
The first part of the answer is indeed to always plan with the expectation that economic downturns can and will happen. On average about every seven years or so. Yet, it is amazing during good economic times how many people begin to downplay and then ignore the likelihood of another setback ever happening.
Doing so defies reality and history. And eventually tanks many businesses. Just ask all the formerly-high rolling financial businesses that failed during the great recession!
To protect your business from being tanked in the next downturn, I think it’s generally a good idea for businesses to make decisions and manage their finances with the goal of being able to make it through a 20-30% drop in business sales that lasted 1-2 years.
A great help in achieving this ability can be to have recurring revenues or perhaps long-term contracts, as I’ve recently covered here.
In the absence of that or when a sales dip occurs, businesses are generally forced to consider cuts to their largest costs – often including labor. Additionally, at any time, businesses should be careful about entering inflexible long-term cost obligations they and their business could not cover if business sales took an extended hit – including things like debt obligations, mortgages and other “must pay, cannot change or suspend” installment payments.
Another key solution – and the focus of this commentary – is for businesses to “fill the sales gap” by shifting to offer alternative services that are “traded down to” or bought as substitutes when the economy is bad. In construction, that may mean focusing on new construction when the economy is healthy, and repairs, renovations or smaller jobs when the economy is poor.
Since I cannot custom-answer this question for every reader, let me end by encouraging you to focus on your best fit “counter-cyclical” revenue options by posing these two questions:
- What do your customers continue to buy or even buy more of when the economy is down or when your main services are out of season?
- Of those things, what products or services can or should you offer that you can produce with your existing staff, assets, and facilities and without making costly adjustments?
More than likely, your business can help itself by having plans that answer these questions before your next “off-season” starts or the economy hits its next downturn. If you need any help evaluating what your best options may be for doing so, I encourage you to contact us here.