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.
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: