To understand exactly how your business makes money and to grow the amount of money your business can potentially generate, you need to take the time to define your business model. This will ensure that you project the right growth trajectory for your SME – ensuring its success.
What is a business model?
Your business model defines the way your SME operates. A good business model outlines exactly how you’re going to make your business work and essentially explains how your business is going to make money.
Because your business model combines your vision for your SME (the why) with the means of achieving your vision (the how), it’s critical that you take the time to put one in place and work to refine this on an ongoing basis.
The difference between a business model and a business plan
Don’t confuse your business model with your business plan. Remember that your business plan is an operational document that’s usually in place for a three to five-year period. It outlines your plans to grow your SME and make it sustainable (i.e. expansion projections; how to drive sales; when to introduce new products etc).
Your business model on the other hand, defines how your business will make money. As such, it functions as the engine-room of your business plan, showing you how your business will actually operate.
How to develop your own business model
Develop your own business model by asking yourself the following questions:
- What is the flow of transaction within my business?
- Who are the key players involved in making these transactions?
- What is my value proposition to the market? (What makes my business unique?)
Take a look at how I’ve answered the above from the perspective of a small cleaning company. This will give you a good idea of the kind of answers you’re looking for – ones that describe the “nuts and bolts” of your business…
- What is the flow of transactions within my cleaning company?
If I examine how money flows in and out of my cleaning company, I can see that:
- I employ people. (Money flows out of my business.)
- My clients pay me for my services. (Money flows into my business.)
- I may also have obtained start-up capital. (This is a reserve of money that I can use to make payments or to invest in my business.)
Once you’ve answered question 1 in this way, you then need to flesh-out your answers by listing all the other costs involved in providing your company’s services. This will include everything from office space to electricity and transport, to buying the products you need (e.g. cleaning materials) to deliver your services.
As you can see, by answering this question as comprehensively as possible, you’ll soon get a very clear idea of where money is coming from – and going to – in your business.
You will also have started to answer the second question:
- Who are the key players involved in making the transactions in my cleaning company?
By defining my basic flow of transactions, I have already identified the key players in my business, namely my workforce and my clients.
I also need to ask myself the following, however:
- Who provides access to my markets and my clients? (Are there certain clients who are promoting my business? Am I on key supplier lists?)
- How do I source new clients? (Is this through direct advertising, word of mouth etc?)
While you’ll need access to the market to generate revenue in the first place, answering these questions will provide an even clearer picture of your flow of capital. This will help you identify the key partnerships essential for your business. These are partnerships that need to be nurtured.
By seeing where you’re making your money, you’ll then be able to consider your revenue in line with your value proposition:
- What is my value proposition to the market – what makes my business unique?
(Remember that your value proposition is what separates you from your competitors in the market. It’s that “magic ingredient” that ensures customers choose you!)
Here I need to separate my core business (i.e. cleaning) from any additional services that could be linked to the core business I provide (i.e. selling hygiene products to my customers). (Bear in mind that all additional services could help you increase your revenue.)
When you’ve separated your core business from your additional offerings, focus on what sets you apart from your competitors in both respects. Consider how you can use and market this value proposition even more effectively.
Implementing your business model
While developing your business model is critical for the success of your SME, it’s equally important to then take your business model to the market and test it with the key partners you’ve identified. This will help you to make necessary tweaks where required.
Also remember to share your business model with your team: ensure they understand how you see your business making money, and the important role they play in this process. If your business succeeds, they all win! Get their buy-in and additional ideas for refinement.
In conclusion, bear in mind that this is a process. Start with a basic business model that covers the basics outlined above – and then build from these.