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: http://business-model-design.blogspot.com.

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.

Top 5 Tips for Surviving in an Economic Downturn

As a small business, you may feel especially vulnerable to less than favorable economic conditions.  Certainly, the global outlook for 2009 raises many concerns given the number of countries facing an economic recession.  So, what should you do about it?

The following five tips may offer tactics that you can use to insulate your small business from the impact of global conditions on the Cayman Islands:

1) Revisit your business plan

It's important to examine how your plans for your business will be affected given the anticipated changes in economic conditions.  Consider new directions for your business, perhaps reinventing it to be more appealing to customers.  Evaluate how your current business model is working and any adjustments that need to be made in order to bring your business back to a path that will enable you to achieve your long-term vision.

2) Improve efficiency

It's time to tighten your belt and cut back on non-essential expenditure.  Explore ways to refine your operation to improve efficiency, cutting costs without sacrificing quality in your product.  A good idea is to motivate your employees to be a part of the solution.  After all, they have a stake in the survival of your business and hence their jobs.

3) Improve your cash flow

Cash is essential to your business and you want to make sure that it's coming in faster than it's going out.  Talk to your suppliers to see if you can negotiate better terms on deliveries.  Be more aggressive in collecting accounts receivable.  If you foresee problems, remember to talk with your loans officer so that your bank is aware of any potential delays in your loan repayments.  

4) Focus on your core market

Most businesses depend on a group of key customers.  Be sure to strengthen your relationship with this group, watching for changes in their behavior and adjusting as necessary to ensure continuity in the relationship.  Through providing a high level of customer service to this group, you may also develop a better understanding of your core market and gain insights that will help you attract other customers that share similar characteristics.

5) Focus on effective marketing

If there ever was a time to focus on effective marketing, it's now.  Remind your customers that you are still there and of value to them.  Generate new leads and cultivate new relationships that will bolster revenues.  Remember that advertising takes time to be effective, and be sure to evaluate its success.

One other important tip is to network.  At the Small Business Network meeting on Nov. 20th, several entrepreneurs raised examples of the importance of networking to their businesses.  Whether you network with supporters or advisors who can help to guide you through tough times, alliance partners who will allow you to add value to customers or share costs, or strengthen your existing relationships to improve loyalty, networking is an essential function of an entrepreneur no matter what economic conditions are expected.

Welcome!

Welcome to a discussion on small business issues for entrepreneurs in the Cayman Islands.

Whether you are starting a business or expanding your existing business in Cayman, I encourage you to share your thoughts and experiences on topics that affect you and your venture. A strong network can help provide guidance and assistance as we can all learn from each otehrs experiences.

This blog is currently in development, but please feel free to send comments or suggestions for to dax.basdeo@investcayman.gov.ky.