Diversify Your Business Income: Investments and More

If you find your business is struggling financially, you might need to diversify your business income beyond a reliance on sales or expand your portfolio to include more products. If you want to attain more financial security, you might need to consider some strategies that can bring in more cash to your business. In this guide, you’ll discover what mistakes you need to avoid when you consider options to diversify your business income, so you can make sure that you always have a strong source of income, regardless of whether or not your business stays profitable.

diversify your business income

Income versus cash

A key point not well understood by small business owners and others without a trained financial advisor paying close attention to your business, is that there’s a huge difference between income and cash. Both are critical for the success of your business in the long run but they serve different purposes and indicate different problems that require different strategies.

Income reflects the yearly, quarterly, or monthly sales achieved by your firm across all operations, although sometimes larger businesses divide income into categories based on product lines, regions, or some other bureaucratic division that makes sense for their operation. Cash only reflects the amount of money you have in liquid forms, such as bank holdings and short-term investments, like stocks (more on this later). When you think about the role of money in managing your small business, you might focus most or all of your attention on making sales as a way to drive success. And, don’t get me wrong, increasing sales is very important to the success of a business.

That said, 29% of businesses fail due to cash flow problems while 82% run into cash flow problems that might impact their ability to execute strategy, as you can see below. Among the other major failure issues, many of them can be reduced by doing research ahead of time, such as ensuring your target market needs your product or building a good team to drive success. Cash flow problems are much harder to plan for and many cash flow solutions result in cash sitting around not earning any money for you.

improve cash flow
Image courtesy of SCORE

When I worked for the US Small Business Administration, we recommended startups have up to a year of operating expenses available for starting while the Chamber of Commerce continues to recommend a business keep three to six months of operating expenses on hand (we call this working capital). The rationale behind stocking up on cash is that your creditors want to be paid on time. For instance, if you don’t pay your rent you might lose your property and if you can’t pay for inventory, you don’t have anything to sell, which starts a death spiral. Also, having sufficient cash on hand reduces your operating costs as your suppliers commonly offer a discount for paying early (and a penalty for paying late) and other creditors may charge late fees, as well.

Yet, obtaining cash relies on your customers paying their bills on time. In consumer businesses, this isn’t a big a problem since most are cash-and-carry businesses that require payment before a customer takes the merchandise. But for contractors and business-to-business companies, services and goods are commonly billed. When a customer doesn’t pay on time (or at all), you’re left with bills you can’t pay.

Having bundles of cash lying around isn’t smart either. You can’t make money on cash sitting in your bank account. That’s why many savvy businesses invest their working capital in short-term investments. Below, we discuss some things to understand before putting your working capital into any type of investment.

Investing working capital

Understand your investment

Warren Buffet, who is one of the most successful investors in the world, often says that you need to be cautious about investing in business models that you just don’t understand. The best way for you to build a diversified portfolio would be for you to invest in mutual funds or other types of funds that you can easily and quickly convert to cash when needed for operating expenses or business investments.

But, investing represents the potential for loss (or gain). Hence, only invest with the advice of an investment professional to guide you or after careful consideration of all available information to reduce your risk of loss. Also, build a diversified portfolio across different types of investments, companies, and industries to reduce the chances of losing money if you can’t invest (or prefer not to invest) in mutual funds. You can further diversify your portfolio by investing in silver coins or currency.

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Falling in love

Another mistake that a lot of people make is that they fall in love with a company. Too often, when you see a company that you invested in doing well, it’s easy to fall in love with it. You have to remember that you bought this stock as a way to make money, and if the company stops doing that you need to sell the stock. This can be difficult but it’s so important that you stay focused on the reason why you invested in the first place.

Lack of patience

A slow and steady approach is always best. It also yields greater returns in the future than jumping from one investment to the next based on changes in price. Unless you have the money it takes to do arbitrage (trading quickly to take advantage of small price changes), any profits you make will be consumed by fees. It’s also easy for a guess to sink your investment money unless you have a highly diversified portfolio.

This kind of turnover, or jumping in and out of a position is another killer of returns. Unless you are an institutional investor and you have the benefit of low commission rates, the transaction cost alone can eat away at your money. You may also find that you end up missing out on opportunities as well, which is the last thing you need. Be sensible and make sure that you don’t turn over more than you can afford.

Keep your expectations realistic and also give some thought to the timeline you have to grow your portfolio. It’s better to stick with your well-researched investment strategy than it is to quit and make a loss, especially if the investment has a chance of recovery.

Attempting to time things perfectly

Trying to time the market will also kill your return. In investing, there’s an old saying: “Bulls get theirs, bears get theirs, but pigs get nothing”. Bull markets are those when the market is generally going up, while bear markets are those when prices are generally going down. You can make money in both types of markets with a savvy investment strategy. But, attempting to time your purchase/ sales to sell at the top and buy at the bottom (pigs) often results in a loss.

Timing the market is difficult, and you will usually get it wrong. It doesn’t matter what you think is going to happen, or what has happened in the past because history rarely repeats itself when it comes to stocks and investments. If you are investing to try and keep your business afloat then you can’t be taking risks based on a hunch, so make sure you study the data and that you give some serious thought to things like this.

In considering ways to diversify your business income and investments, it’s crucial to evaluate your risk tolerance and investment strategy. Additionally, exploring questions like “are you able to time the market?” can provide valuable insights into your approach to financial decision-making.

Other ways to diversify your business income

Investing working capital isn’t the only means to diversify your business income. For instance, you might diversify your product portfolio by introducing more products that appeal to your target market or match your ability when you have sufficient resources or market conditions demand a change. For instance, some companies switched from brewing alcohol to making hand sanitizer to meet an unprecedented demand for one over the other. As you can see below, there are four alternatives to help you diversify your business income. Choose one of these strategies based on your market characteristics and your risk tolerance. Risk increases as you move down and then to the right in this product/ market matrix as a general rule. Note that market penetration isn’t an effort to diversify your business income but part of your normal business operations and represents the lowest risk.

ansoff matrix
Image courtesy of Marketing 91

A diversification strategy, the most risky means to diversify your business income, often means moving into new business ventures, as either a partner (less risky) or a founder in something different than your primary business.

But, there are some less risky ways to diversify your business income. Here are a few to consider:

  • Consider selling online if your primary business is a physical store or reverse this if you operate an online store. We see Amazon and several other online retailers making this change by operating physical facilities where customers can pick up products ordered online. During the pandemic, many physical retailers switched to online-only operations.
  • You might rent out some of your space. For instance, you might offer some of your retail space to a contractor. Many department stores lease out their shoe departments, for example, or other departments within the store.
  • If you have idle capacity in a manufacturing operation, another company that produces a non-competing product might use your idle capacity to make their product.
  • Car companies offer a good means to diversify your business income. They can manufacture more than they can sell under their own brand so they sell excess products under a competitor’s brand name. For instance, Chrysler sells under its own brand as well as the Plymouth brand.


There are many ways to diversify your business income beyond those mentioned in this piece, although these are the most common. Any effort carries risks but also the potential for increased income. Be sure to research any of these strategies carefully before making an investment.

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