How many people actually understand the term “business model”? It’s bandied about by entrepreneurs, financiers and consultants, but often they have different interpretations of the concept. A business model is in fact a description of the profit engine within the business; it clarifies how you are going to make money from the opportunity you have identified. In the process of building a business, it is fundamental that you take the time and effort to clarify and understand your business model.This is done by focusing on the following four issues:
1. Revenue. An entrepreneur must understand exactly who the customer is, why they will be willing to pay for the product or service they receive, and what the timing of that payment will be. Payment can be once-off, which is attractive early on when the business needs cash. Multiple annuity payments are usually more attractive over the long term. Simple businesses will typically have a single revenue stream. A start-up retailer,for example, may derive income purely from over-the-counter cash sales.
Complex businesses tend to have multiple revenue streams – a more mature retailer may earn revenue from sales, interest on credit sales, and payments for premium shelf space from suppliers. Start-up businesses should keep it simple early on, with one or two revenue streams, and increase those revenue streams over time.
2. Cost Drivers. Every entrepreneur needs to incur costs to create revenue. It’s important to understand the true nature and extent of the costs – either fixed or variable – you will need to incur to reach projected revenue and growth levels. Fixed costs imply that a set amount will be incurred no matter what is produced or sold; variable costs fluctuate depending on the amount of output that is produced and sold. It’s also important to understand the payment terms for costs that are incurred as these will affect cash flow.Extending payment terms with suppliers will help alleviate the cash flow strain early on in the life cycle of a business.
3. Investment Required. Once you understand the cash flow implications of the costs and revenue of the business, use this information to calculate what size investment will be required to sustain it through its initial negative cash flow. Almost all businesses go through a period during the start-up phase in which they spend more money than they make. Depending on the nature of the business, the amount of time and level of investment required to sustain it through this period will vary. Entrepreneurs must aim to accurately calculate the size of the investment required, and then add on some extra as a buffer before approaching investors.
4. Critical Success Factors. These are the qualitative factors that could have a significant influence on the outcome of the new enterprise. You must rely on research, intuition and brainstorming to identify these issues. This could include sourcing the right location, nurturing an important partnership, securing a big contract, creating a powerful brand or scaling up to a certain size. By pulling revenue, costs, investment and critical success factors into a single spreadsheet or diagram you will have a clear business model. To make it workable and flexible, you should make every effort to understand how the different components interrelate and what the impact of a change in one component of the model will mean for the others.
Play with the model enough to be able to answer questions such as: “If you only get 80% of your required investment what will the impact on costs and sales be?”; “If you don’t achieve one of the critical success factors what will the impact on cost, sales and overall investment be?” When you review a business plan, spend time on two specific things: determine that you are the right person to take advantage of this opportunity; and assess whether the business model is realistic, viable, sustainable and workable. If these two things are in place the chance of your business succeeding is radically enhanced.
Organisational Design Disruptions Do Not Occur In A Vacuum: Future Business Models
What is the shape of the world in which models need to operate and how do they come together to build future value?
In today’s ever-changing world, organisations are using a disruptive business model design to build unique approaches to creating value and organisations that are ready for the future.
At all scales, from micro-enterprise to multinational, operating in multiple settings and contexts, rethinking business models has become one of definite ways of offering customers something truly better than what already exists.
To ensure sustainable business growth, businesses need to navigate modern economic development and societal issues and in so doing articulate what meaningful, inclusive and enduring value looks like. In the past, a linear approach to business model design may have sufficed – inputs enter a logical process that creates outputs of value.
Today, to truly deliver a value proposition that can flourish, an understanding of the way that complex adaptive systems come together to create both outputs and outcomes is required. ACCA identified12 characteristics that organisations are combining as they build new business models. The full model and characteristics can be read here.
The accountancy profession is well placed to support the growth of business models of the future that help build resilient, inclusive and prosperous societies, by leading in strategic roles. In order to be ready to make the most of these opportunities professional accountants will demand new skills. Financial acumen, technical knowledge and ethical judgement are attributes that the accountancy profession can uniquely bring to support business model innovation across the three spheres of value proposition, value creation and value capture.
But to navigate the contours of a changing economy, new mindsets are required. These include the ability to:
- think like a system
- understand how to capture and assess new sources of value
- build creative capabilities to think differently and problem solve
- adopt a long-term mindset.
Business models of the future: Systems, convergence and characteristics attempts to answer fundamental questions; why does business model innovation matter? What is the shape of the world in which models need to operate and how do they come together to build future value?
Developing A Business Model That Works
Use these six tips to create the financial section of a business plan that will get your company off the ground.
The following excerpt is from Scott Duffy’s book Breakthrough.
What’s the first step in figuring out how to execute your big idea? Creating a working model for your business.
We’ve all been brainwashed into thinking that the best way to do this is to sit behind our desks and write a long, detailed business plan. You know the kind: It starts with a fancy cover and your mission statement, then describes your team, market, product, competition, and so on.
Most entrepreneurs spend a lot of time and resources writing their plan. Too often, they get feedback from all the wrong people. Their friends and family want to support them, but they’re telling the entrepreneurs only what they want to hear — that they have come up with the next Google or Apple or Tesla (keep in mind, none of this feedback is coming from customers).
By the time the entrepreneur gets to the last section in the business plan — the financials — he’s totally sold on the idea. Sometimes the financial section is left unfinished or dropped entirely as the business is launched.
And why not? We’re passionate. We’re committed. We know we can’t fail. So what are we waiting for? Let’s go!
Here’s the problem: Most entrepreneurs change their business model six times when working through the financial section of their plans. While running the numbers, they identify key distinctions with regard to income and expenses. They gain a deeper understanding of what it will take to break even and how to achieve free cash flow. As a result, they come up with better-informed strategies for attaining their desired financial outcomes.
The most important part of the initial business planning process, and the one people most often neglect, is getting your numbers to tell a story that makes sense for you and your investors. If you start at the beginning of the plan only to learn that your assumptions about the business don’t add up once you reach the end, you’ve lost valuable time and money.
Regardless of whether you’re in startup or growth mode or moving to the next stage of your business, mistakes can be costly, so here’s what I recommend:
1. Start with the last page first
Once I have a basic understanding of what I’d like to build, the market, my target customers, the business opportunity, and the product, I dig right into the numbers and create a simple one-page spreadsheet that clearly identifies how the money flows. Basically, I write business plans backward. I’ve learned that once the numbers tell the story you want, the rest of the plan will write itself.
2. Don’t wait
Don’t make this process more difficult than it needs to be. Limit your model to one page. Create the simplest, most basic spreadsheet you can that identifies income, expenses, breakeven, cash flow, and the capital required to achieve your outcome. Use conservative assumptions, and don’t rely on best-case scenarios.
3. Get out of the office
You’ll learn more about your business by getting into the market than you ever will sitting behind a desk. At least 50 percent of your time should be outside the office gathering information that can be applied to your plan. That means contacting industry insiders to learn more about the market, talking to prospective customers about their needs, and testing your competition’s products and services.
4. Be careful who you listen to
When we have an idea we passionately believe in, we’re convincing. It’s easy for our family and friends to tell us we have a winner on our hands because they want to be supportive.
But when you’re modeling your business, the people whose feedback matters most are current and potential customers. Listen to what they have to say and apply what you learn to your model. Let their feedback, and not your enthusiasm, sway your projections.
5. Don’t throw out negative feedback
Sometimes it can be difficult to absorb negative feedback in a constructive frame of mind because we’re so close to our projects and have so much on the line. We start rejecting and deflecting feedback that isn’t in line with what we believe.
But honest, educated feedback is like gold — use it to open your mind and ask tough questions about your assumptions. You must be obsessively committed to asking what you can learn from this feedback and how you can apply it.
This is especially important for people entering new markets where they don’t have prior experience. Getting feedback from others who’ve lived in the space will add to your perspective. Sometimes you’ll learn that there are things you don’t know as a newcomer that would significantly impact your financial results.
In fact, this holds true throughout your business’s lifetime. The entrepreneurs I know who’ve built the most successful and thriving businesses are obsessed with getting constant feedback from the marketplace and adapting their businesses based on evolving market needs.
Related: Developing a Stable Business Model
6. Be open to what the numbers tell you
The worst thing you can do is try to manipulate a model to match your assumptions. You need to approach your financial model with a completely open mind.
Recognise that it will probably take longer than you initially thought to get to market, generate revenue, create profits, and accumulate the cash flow you need to operate and further invest in the business. By being open, you’ll be able to make distinctions, apply them to your business, and set yourself on a path to success.
You need to be clear on where you want to go and put a simple and adaptable plan in place to help you get there. The clearer your vision is upfront, the easier it will be to back a plan to help you get there. Being obsessed with customer feedback will enable you to tweak strategy in a way that evolves with the market and helps keep you on top of the competition.
This article was originally posted here on Entrepreneur.com.
4 Types Of Business Models To Suit Your Business Concept
There are four main types of business models, see which one suits your business concept.
Different types of business models suit different types of businesses. A business model is the way that a company sells products to its customers. It describes how a business creates, delivers, and captures value.
What type of business model should you adopt?
A business model defines how the enterprise delivers value to customers, gets them to pay for that value, and converts those payments to profit.
There are four basic types of business model that any for-profit business will fall into:
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