What would you do if you owned a store that is normally visited by 100 people a day, and suddenly, starting on a random day only 10 visitors come in?
You are fucked, that's what.
And still, this is what happens to small businesses and start-ups so often that you would almost call it normal. An important customer cancels their contract, the webserver goes down, a snafu messes up your inventory, or Google decides to stop sending traffic to your website. And with small overall revenue of maybe a couple hundreds of thousands to one or two million per year, all of these events have the potential to significantly affect your revenue.
Most of these have already happened in my businesses in one way or the other. Most recently, the traffic died on one of our websites. This is your worst nightmare if you have a website that is depending on organic search traffic. One day, you wake up to virtually no traffic.
So how do you prepare against potential massive drops in revenue?
The theory is easy, of course. "Secure revenue streams are diverse revenue streams", the saying goes. The ideal situation is that no income stream makes up more than 20% of your overall revenue. In start-ups and small companies, this is easier said than done. Would you turn down a customer just because the contract is 40% of your income? Of course not.
As I see it, as a small business, you should look at diversification as buying time in case one income stream goes foul. How much time do you have when your most significant income stream vanishes to find a replacement? In general, I would shoot for more than six months.
Let's say your company has 100,000 income per month, 40% of that coming from your largest customer. Your expenses are 70,000 per month, leaving a net profit of 30,000 - or a minus of 10,000 per month if your big daddy goes away. After cutting expenses, you should be off to a modest monthly loss that hopefully you can sustain for at least six months with your company's savings.
Another strategy is to "insure" against income loss by hedging against potential losses. For example, as company and investors, we hedge against the risk of traffic loss by buying stock in Google, Apple, Microsoft, etc. As site developers, we hedge by running many websites in unrelated niches.
In our case of the Death Valley of traffic, there was a Happy End, by the way. On May 19th, traffic suddenly came back to the site. Thanks, Google. :)