Of all the tests that small- and medium-sized businesses (SMBs) face, the feast or famine cycle is one of the most challenging.
That’s because if you’re an SMB owner, not using prosperous periods to prepare to handle harder times can spell disaster.
The issue is especially prevalent for enterprises that work in cyclical industries; that is, those where revenue fluctuates in periods of economic prosperity and downturn. The agricultural market, for example, tends to be cyclical, as the cost of raw materials and heavy equipment depends on the current economic conditions.
SMBs in cyclical industries must thus learn how to plan ahead.
JP Morgan Chase research shows that firm growth can drop off significantly in years 3 and 4 for SMBs in the US, and being unprepared to go without regular income during this time can induce a crippling “famine.” Indeed, for these young and growing businesses especially, the feast or famine cycle can be deadly.
That is because this fall in revenue can also sap confidence in investors, affect employee morale, and lead to stress and burnout for those in charge.
Yet, despite the cycle’s well-recorded negative impact, many small businesses are unaware that they’re trapped in a cycle that they can actively work to avoid.
For owners to tackle this issue, the first step is to learn what the feast or famine cycle is exactly, and why it happens: only then can they take action to spring free of the trap.
Put simply, the feast or famine cycle is a pattern where businesses bounce between feasts of intense activity and the famine of prolonged standstills.
One is brought about by the other.
The business devotes so much of its energy toward completing work during busy times that it neglects its sales, marketing, and other investment growth activities. The result? No work is lined up for when they finish current contracts or the market slows up, and a drop in income occurs as the business waits to set up a new project.
The business owner, therefore, has no control over their revenue or profit when in this cycle.
Instead, they often operate at the whim of their clients, who might sense their desperation for new business and use it as a lever in price negotiations. The business may also struggle to find the right type of customer due to inefficient marketing.
Recognizing this issue is happening is an important first step.
However, if you’re a small business owner struggling with this cyclical effect, then you’ll need concrete action to resolve it. Just as importantly, you’ll want to prevent it from happening again in the future by investing in growth.
One of the most common causes of famine periods is inefficient marketing.
Many SMBs stumble upon clients by chance or via referrals. This works to an extent, but isn’t a viable long-term strategy toward securing a steady stream of business that acts as a buoy during times of hardship.
Setting up a dedicated marketing department and onboarding a specialist is the most effective route to achieving this, especially if you have no marketing experience yourself.
A marketing expert and/or a marketing department will help you:
Despite these important skills, it’s surprising how few SMBs employ a marketing specialist. Only 5% of manufacturing companies have one, for example, so hiring an expert could prove to be a serious competitive advantage should you work in this sector.
If you can’t justify the cost of hiring a marketer, then there are a host of detailed online marketing guides aimed at a wide range of industries.
Simply drawing up a plan of action is a big first step as you’ll have a clearer picture of what to do to avoid lower-revenue periods in the future.
As mentioned, a key cause of famine periods is a complete lack of business development during busy times. While it’s unfair to expect SMB owners to keep every possible plate spinning at the same time, creating a skeleton sales model during feast periods is a realistic and sensible objective.
The key to this measure is allowing for the flexible organization of sales meetings.
Keep all of your potential new leads or past clients in a spreadsheet or notebook. Then, during times of intense activity, find time to meet or call a small number of them every week, whether it’s at a business event or a 10-minute Zoom chat. Although it may seem like only a minor action, repeating these meetings regularly over time can amount to huge gains for the business.
Let’s say you have six months of intense activity, but you find time to meet two new leads per week. That’s around 50 potential clients. If we apply the industry average conversion rate of around 5.6%, then you’ll have about three new customers lined up for an upcoming quiet spell.
Another great thing about this tactic is that you should be able to blend it in easily with your daily routine. Even during busy periods, you should have the time to put aside a couple of hours a week for networking, perhaps even as part of your social activities.
As well as improving organizational skills, this method has the added benefit of spreading the mental burden of acquiring new business over a longer period. You can also easily adjust it so that you can step it up through lulls in business.
So far, we’ve spoken about two ways of sharing the work burden of an SMB: acquiring the help of specialists and spreading lead-generation responsibilities over a longer period.
Automation is a third way.
McKinsey global research points out that the success rate of SMBs who automate parts of their business is higher, yet they are less likely to take it on than larger firms.
Automation brings many benefits. It gives workers time to focus on more valuable work and eliminates human error, for example, and it is an important tool in making data-driven decisions.
We can also use it across several business areas, including:
Lead and contact management (CRM)
CRM software such as Salesforce involves computerized sign-up forms that add leads to your database and marketing lists. It can score and segment leads according to the actions they take so that you know which ones to target, leading to personalized communication and a higher conversion rate.
Automating ticketing assignments for queued customers is an effective way of showing you intend to help them soon. Chatbot technology, meanwhile, is improving to the extent that it often feels like a human is taking care of the issue.
Automatic reports that break down performance data into digestible chunks allow you to understand how the business is doing with next-to-no manual effort.
Pulling together several automation tools so that they do a lot of the heavy lifting during day-to-day operations is a cost-effective way of keeping your business ticking forward during hectic periods, and all while putting you in a better position to deal with quiet periods.
The hardest part of famine spells for businesses is the inevitable disruption to cash flow that comes with it.
Not knowing where your next chunk of revenue is coming from not only saps momentum, it can also jeopardize credit repayments and send warning signals to creditors. Not only that, but it may also affect the morale of employees who get wind of the situation.
Applying sensible financial practices during bountiful times is essential for this reason.
Simply setting aside money from each month’s revenue to create an emergency fund that covers expenses in uncertain times can make a major difference. While this may sound like basic advice, 44% of small businesses don’t have enough cash reserves to cover three months of inaction, according to data compiled by Goldman Sachs during the COVID Delta variant wave.
If companies find themselves in this financial situation, then securing short-term financing options can be a useful tool for keeping momentum going during these times. A good financial advisor may be able to find a small loan that you’ll be able to repay comfortably during the next ‘feast’ period.
Yet, even a financial advisor worth their salt may struggle to find suitable financial products for SMBs.
Big US banks rejected over 70% of SMB loan applications as at January 2019, says data compiled by Biz2Credit, a small business lending index. Inadequate credit history or cash flow are among the most common reasons for small businesses to have their loans denied.
Then SMBs are faced with a vicious circle: poor cash flow means they need a loan, but to get a loan they can’t have poor cash flow.
However, SMB owners are now able to overcome these hurdles by using a new financing product that assesses different business factors beyond the scope of traditional lenders.
Duckfund uses AI-based business analytics tools to collect business and financial information about businesses to get a true picture of what its potential is, beyond credit scores and bank statements.
This means higher approval rates and increased lending options for SMBs struggling through the feast or famine cycle, leading to financing that can help make these disruptive periods a thing of the past.
Looking for a business loan to help you through the next few months? Register with Duckfund and apply for a loan in less than one minute.
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