Home' Trinidad and Tobago Guardian : May 17th 2015 Contents Client Situation
illiam, 47, a self-
for 15 years, has had
his fair share of good
and bad times in
business. He boasts
his proudest accomplishment is the large cache
of equipment worth $450,000, which is stuffed
into the ground floor of his home. His wife
Jackie is often furious when he comes home
with a new gadget especially in light of the
business current cash position.
William provides three distinct services each
of which requires different sets of tools. William
is a sort of Jack-of-all-trades but master of
none; mainly because several years ago he had
to get into different things due to the slowdown
in the economy.
This diversification caused him to operate
on a rather adhoc basis and he now constantly
switches things around based on client
requests. He would love to invest more time
and money in the service that is showing the
most promise but he is finding it difficult to
abandon the other two income streams. The
obvious challenge is the lack capital ($100,000),
which he tried sourcing from his bank but the
request was denied.
Jackie has been pressing him to sell off the
"junk" he has clogging up the workshop and
get the money he needs to expand the business.
If he does this he will lose 30 per cent of the
William disclosed that out of the three lines
of business the one he wants to build up only
uses a quarter of the tools in stock; the other
two lines account for 30 per cent and 45 per
cent respectively. He also disclosed that each
service generates about the same revenue
($5,000) each month. Just thinking about such
a major change keeps him up at night.
Nick's Assessment & Advice
One of the biggest challenges about staying
in a particular business is that, with each pass-
ing year, the entrepreneur gains more expe-
rience and their clientele grows.
William is no different and this makes his
decision even more difficult because he has
already established three distinct clienteles
and operations. The downside with his business
model is he may have reached a plateau due
to limitations in his capacity. He may be doing
a good job but he knows he can do better and
earn even more.
Undoubtedly there are great benefits with
diversification but it also takes away from his
ability to specialise and develop a strong and
expanding clientele in the area that would
yield the greatest returns.
Transitioning from being a generalist to a
specialist can be a bit unnerving because of
the obvious fall out in business. The benefits
can be compared to a vinedresser who prunes
off excess bunches of grapes so as to strengthen
the ones left on the vine; this yields a better
quality fruit and a better quality wine at the
end of the day, which fetches top dollar.
William has 15 years under his belt and his
intuition is telling him he should take the
plunge but the fear of the unknown and his
apparent lack of cash could be paralysing.
Another fear could be: if he does not make
the move he may never realise his full potential
and never get paid what he is truly worth.
There are hardly any decisions in business
that come without the chance of loss however
by putting his numbers together William can
make a calculated risk.
Income & return on
We are told that William generates a total
of $15,000 in revenue monthly split equally
across three lines of business (LOB). Each line
of business is a service that depends on the
use of specialised equipment. His total stock
of tools is valued at $450,000; one quarter of
this ($112,500) generates one third of his
The other two lines generate the same
income but with tools valued $135,000 (30
per cent) and $202,500 (45 per cent) respec-
tively. Whilst we were not given information
about how much space these tools occupy in
his workshop we will assume that the per-
centages above also relate the spatial distri-
bution of each LOB.
Table 1 shows this information and seems
to support William s gut feel about LOB #1
which produces a better return on investment
(53 per cent) than the other two lines (44 per
cent and 30 per cent respectively).
Pursuing this option means that he has to
put out a significantly smaller capital amount
to get a better return. From a spatial standpoint
it also means that he will use less space to
generate more income, therefore his income
per square footage would also increase. Effi-
ciencies will also improve, as the process flow
will be simpler and the operation much smoth-
er which will translate into more output with
The big question would be: are these suf-
ficient grounds to make such a dramatic shift
Only William can say, for certain, if the
market size and demand of the single line are
sufficient to replace the lost income from the
discontinued LOB s. However, if we assume
his assessment is correct, then his next step
would be to consider how he will raise the
William believes that he needs $100,000
to purchase new equipment to replace the
existing income streams. While no one knows
his business better than he does ---if we were
to compare the income-to-capital ratios based
on the benchmark of LOB #1---he will need
more capital to replace the loss in income from
the discontinued LOB s. Until LOB #1 picks
up the slack he will need to cushion the fall
in revenue by adequate cash reserves.
It might be a good idea to make a gradual
shift by dropping the most inefficient line (#3)
first then after some time dropping the second.
He might be surprised to see that by simply
dropping just one LOB, the extra time on his
hands will allow him to concentrate more of
his attention to what makes more money.
Table 2 shows what would happen if he sells
off the equipment from lines #2 and #3. Based
on the shrinkage of 30 per cent, he will recover
a total of $236,250. However if he only sells
off #3 he would raise the $100,000 he wanted
with $41,750 extra.
Notwithstanding the potential increase in
efficiencies William may still need to put out
a little more than the $100K to replace the
$5,000 income lost from #3.
Based on what obtained with line #1 he
may need to take the investment up a little
to $112,500. If he does this he will be left with
$29,250 ($141,750 - $112,500), which will buffer
the lost income for about six months.
F C C
MAY 17 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
Knowing when to specialise
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