Monday, 8 December 2008

Building a Robust Business Model

A business model can be viewed as the framework for the value that your business creates and describes the way in which the business makes money. (Note: A business model is not the same thing as a business plan, but every good plan has a business model at its core). For an excellent overview of Business Models, visit:

Given the importance of your business model, getting this right is essential for your business’s success. Building a business model that can withstand adversity should therefore be of concern, especially given economic forecasts for the coming year. Below, I outline 5 factors to consider when building your business model.

1. Understand personal costs
As a small business, you’re in business to support yourself and your family. It is critical that you understand your own personal financial situation, and therefore what your business has to do for you in terms of both a salary and some rate of return. At a minimum, your business must pay you a salary, and there must be a clear distinction between your personal accounts and your business’s accounts.

2. Conduct a thorough cost analysis
This is easier to do if you have been in business for at least 8 to 12 months. It is important that you cost your products accurately, and to do this requires a clear understanding of all the costs that you face (or might face) in business. Certainly the last thing you need during tough times is a surprise expense that throws off your cash flow budget and jeopardizes the business.

3. Build in contingencies
While you want to be as accurate as possible when working through your costs and your budget, always build in contingencies to account for a variety of factors. Inflation, interest rate increases, gas prices, other supplier costs – it is highly unlikely that your costs will be exactly as projected, so make sure you have a buffer to be able to absorb these changes.

4. Account for wastage
This does not only apply to reducing waste and ‘greening’ your business. Some degree of resources used in production is wasted (either planned or unplanned), and this is a real cost to most businesses. The easiest example is a manufacturing business in which some allowance for defects or spoilage should be made. As a cost to the business, you should be aware of this, and make the necessary adjustments to your product cost estimates.

5. Design for elasticity and scalability
Your business should not be rigid and inflexible. As a small business, one of your great advantages should be an ability to react and adjust to market conditions. If demand dips sharply, can your business survive – and for how long? If demand increases, can you scale your business and expand to capture this growth?

In summary, there are many assumptions upon which your business model is based. Many of these have direct cost implications, others (such as demand projections) affect the bottom line through an impact on revenue. It is important that you understand all of these assumptions and identify the critical control points that affect your business. These points are those where assumptions on cost and revenues can have the most serious consequences for your business’s viability if you have not insulated your business in some way from negative effects.

1 comment:

  1. Hi ,

    who in your bureau can help to create a business plan?