The sustainability of your business revenue is important to understand if you want to keep your business solvent.
Chunky Business Revenue
Some revenue is what I call “chunky money”. Chunky money is revenue that is unpredictable. One month you may have lots of sales, while another may be void of any sales.
A used car dealer is a good example of a company that gets essentially all its revenue from chunky money. Chunky money revenue is unpredictable since the weather, the economy, and other external forces can easily affect your monthly revenue.
Predictable Business Revenue
The other sources of revenue are far more predictable.
Examples of predictable revenue include a labor contract for one year or a situation where a customer’s need for a product or service continues.
People’s hair continues to grow no matter what, therefore a barber or hairdresser, so long as they can keep their customers happy, will continue to see revenue from their customers month after month.
Revenue Type and Debt
Understanding the sustainability of your revenue is an important attribute when it comes to incurring business debt.
Several good months from chunky money sources may incline an owner to expand his business, thinking that next month will be like the past month, only to discover he can’t make future payments on the debt because the revenue was not consistent.
This is what I call the Circus Comes to Town. When the circus comes to your city people from the surrounding towns flood into the city. They stay in hotels, eat out, etc. For a time it looks like business is booming. Many business owners may fail to associate the surge in business the circus being in town and think they hit the big time. However, after a few days, the circus leaves and business volume returns to normal.
Companies with more chunky money type business revenue are better off pursuing equity financing since dividends are tied directly to profits, while businesses with more predictable and sustainable revenue may be better served with debt financing.
What is the source of your business revenue? Which form of financing makes the most sense for your business needs?
