Tesla has been in the spotlight this year as the company’s stock price has skyrocketed to record levels, delivering a solid 256% return to those who have jumped on board of the company’s long-term vision.
Tesla entered 2020 with many key milestones on sight including further advances in the development of self-driving capabilities for its vehicles and the construction of its mega factory in Shanghai for Model Y, while also showing progress on another key project – a factory in Berlin for Model Y.
However, the COVID-19 pandemic took a toll on the company’s plans, disrupting its capacity to move forward and ultimately its revenues, as the resulting deceleration in the global economy affected the number of vehicle units it managed to put out.
Despite this gloomy outlook, Tesla managed to attract the interest of both retail and institutional investors who apparently see much more than what the numbers currently show and the company did not let them down, as it posted its fourth consecutive profitable quarter in the midst of this unprecedented crisis.
After digging a bit into the numbers, the reason behind this achievement becomes clearer – Tesla has a diversified business model that relies on various revenue streams that cushion the impact of potential temporary disruptions in one of its segments.
The importance of diversifying your income sources
Diversifying your income sources is a risk management strategy that pays off during times of economic distress.
As business consultant Jasdeep Singh (@singhjasdeep_) puts it: “You get to know little things about risk and finance and they two work together. This understanding is necessary in order to have a great approach to finance and risk management as one entity”.
Diversification is a cornerstone of risk management and entrepreneurs should take a lesson from Tesla in this regard, as the company managed to offset the lower sales it saw on its automotive segment by selling regulatory credits to companies that wanted to avoid environmental fines in the United States.
While some critics may say that Tesla is just propping up its net income through extraordinary income, a closer look to its income statement would tell you that this is a well-thought strategy that aims to diversify its income sources to cushion the impact of lower vehicle sales during a rough season like this one.
What entrepreneurs can learn from this
If you are starting a business or putting your best effort to build up an existing venture, you should understand the basic advantages behind the principle of diversification.
By increasing the number of income sources your business draws money from you will reduce the likelihood of experiencing cash flow issues during times of distress.
For example, if your business relies too much on a small number of customers you should find strategies that allow you to grow that customer base to avoid being affected by a temporary disruption in your client’s regular order flow.
That same principle also applies to staff, inventory, and operations management, as entrepreneurs can always find ways to diversify their exposure to single sources, following an old but well-known adage: “Don’t put all your eggs in one basket”.