Starting a business is all about communicating the benefits of your service or product to the appropriate audience. Although fairly straight forward in principle, the complexities of executing this vary for every business.
To get up and running, most service businesses begin by undertaking project based work. They tender for a job, set a price for project completion, and if successful, do the work. This typical business model sees businesses going through up and down cycles (often beyond the control of the business) with the ebs and flows of project demands.
The transactional and sporadic nature of this type of business model does not usually encourage a regular and steady flow of work on a long-term basis. However, because it does not require a long term commitment on the part of the customer it can help overcome customer resistance about engaging your business. It also provides such a company an opportunity to demonstrate value and expertise.
Given the typical higher fees associated with transactional work, if you are bringing in a steady flow of work, revenue can grow much quicker than expected. When this happens, what next?
As a business owner and manager, it is easy to get caught in the trap of relying on this lucrative project based work at the expense of long term growth. However in times of a slowing economy and business downturn such projects can dry up spelling hard times for the business. At those times having a component of long term growth in the business can be ‘life saving’. However, it can be very difficult to build a platform for sustained growth if you can’t predict your revenue on a longer term basis. This longer term income is often called “sticky revenue”.
Sticky revenue is the sort of income, although usually lower in value when compared to your project based fees, that might continue for many years. It typically involves some sort of retained service agreement and moves away from project based work. Although this may involve forfeiting short term revenue booms, it results in long term predictable cash flow. Convert enough clients or customers to a retained service agreement and you can begin to build a platform for growth.
By overcoming cash flow uncertainties by transitioning clients to sticky revenue, investing in business growth plans (like new staff, equipment, capital or technology etc.) is no longer impeded by concerns surrounding future affordability.
As you continue to build sticky revenue, you will also find that you gradually ween your business from its dependence on your own personal exertion. This not only gives you back some of your personal freedom, but in the long term makes your business far more valuable to an acquirer when you eventually plan your exit.
About the author:
This article was written by Matthew Vickers CFP®, Principal Adviser at Snowgum Financial Services