Business Model Basics – Getting It Right First Time

Firstly, this article is not intended to be an exhaustive resource on the subject, nor is it aimed at corporate businesses whose business models can be very complex and take years to put in place. The idea here is that I will introduce the basic idea of business modelling to those unacquainted with the process, so that they can look at their business and consider their business model (if it even exists) and possibly review things a little to get back into shape.

So what do you understand by the word ‘model’ apart from fashion and plastic aeroplanes, a model comprises of a structure of components, that when put together, make the total picture, (so actually the plane metaphor might not be so far out). When we apply the word ‘model’ to your business, we are in this case looking at the various components of the business that will add value to your customers, hence creating the demand for your products and services in the marketplace.

Some of what you will cover as a business model may be found in your initial business plan (if you ever had one) but a business model is not the same as a business plan. A business model represents the DNA of your business. It is the blueprint of what will make your business work and deliver the returns you want, I assume here that most people are in business to make a good lifestyle for themselves, which will come from the profits derived from their ventures into the world of business.

So the basics of your business model will look at what is your business doing? A definitive question and deceptively simple, but many companies don’t actually have this locked down. What is your business doing? Is one question and there will be an answer to that most people will readily be able to answer, but the next question, far more powerful, is what do you WANT your business to be doing?

Now you are in Business Model territory, as you are defining what you WANT to do and how our business will work in the most effective way to get there.

So now you have the starting point for your business model, next you need to figure out the process of how your business will make as much money for the least expenditure of resources in terms of your time, effort, travel, purchases, financial input, as possible. A bad business model is typified in small business, (and even large businesses to some degree) by the business owner effectively running around like a headless chicken, and the staff doing the same, trying to keep customers happy, then looking at their bank balance and realising forlornly, this isn’t working!! And this can be ultimately placed at the door of a faulty business model.

So now you have a laser beam vision of what you WANT to do, you need to look at the basic dynamics of your business: How you will turn your available time and resources into a good return on your investment.

A really good place to start is with your pricing, pricing is probably one of the biggest areas that people get wrong. When you set your prices too low, and your effort and resources to get those products and services to market are too high, you have got it wrong. Setting the wrong price means your business is not going to be scalable, i.e. you cannot grow and make any real money as you have no cash left over in the business. So pricing is a good area to start putting together your business model.

Pricing can be a complex area, but the two things that affect it most are, firstly, what your customers are willing to pay? And secondly, how much you need to charge to make your business profitable.

So now we have an idea of what we want to charge, we now need to look at how we will add value through our products and services, in the most efficient manner so we take as much of that money we charge for ourselves, obviously allowing putting some money back into the business to create a cash reserve.

Time is the next consideration, very importantly, how much does your time and that of your staff cost? Actually work out how much that time is worth in terms of a cash value. Work out how much travel you are doing, (or if just starting out, how much you think you will be doing), to service your business?

A good business model will be one where your business has scalability built in, this simply means that the business CAN grow, beyond simply yours and your staff’s available time, so you are not at a ceiling point and you can grow, (if that is what you want).

Even if you run a business and decide you are happy with it being small and keeping it that way, you will almost certainly want to have comfort in the use of your time, so that you are not running around with no time left and not enough reward.

The next area is buying. What are you spending money on and how much are you paying relative to how much you are making? A good business model will be one where you have aggressively (in the nicest way) sought the best prices so you can make a good profit, allowing for delivery charges etc. Look at this area and make sure it works, that is modelling, simulating the scenarios so you can see it all working.

The last area I will ask you to consider, is what you are personally taking out of the business? Many business owners are taking a little too much from their businesses and that can extend to the salaries and benefits extended to their staff. I am all in favour of having a highly dedicated workforce, and this should rightly be rewarded, but control is so important here as getting it wrong can be difficult to reverse once it is allowed to get out of control.

Your business model MUST be able to sustain the money you are taking out of the business, as mentioned, the idea should be that the business grows a surplus of cash, so that you are well placed for any opportunities that may require funding, or for overcoming any short term adversity.

In summary then, your business model is the DNA of how you WANT your business to work for you. It is the simulation of how it will work and an overview of how you will maximise your return for your time, effort and financial investment.

A simple business model can usually fit on the back of a postcard, it summarises the main cornerstones of your success formula, most importantly, you CAN change your model along the way. Very few get it 100% right first time every time, and it’s actually fun working on what will ultimately make you successful and hopefully give you a very good lifestyle.

Let me know how it goes for you.

Phil Ashforth is a UK based Marketing Consultant, working with businesses both nationally and internationally on a wide range of marketing issues and driving many marketing projects forward for both corporate and SME companies.

Small Business Growth: It’s A Capital Idea

Small Business Growth Cycle

The key for small business growth is to start with a solid foundation. That foundation includes a marketing business plan. As we so often hear, planning to fail is failing to plan. And, small business success is about following that plan.

The second part of the foundation is to have sufficient capital. What is sufficient capital? Sufficient capital is to have enough set aside to take care of you and the business for at least six months.

As a marketing business coach I have seen anywhere from six months to a year. The key is to be in a position to sustain yourself. Also, you want to have enough capital to not only sustain your business but to grow it.

There are the two components of the small business growth cycle. You must have a marketing business plan and sufficient capital. Otherwise your probability of getting where you want to go is greatly diminished.

Small Business Growth-Do You Have The Capital

What is capital? You hear about it all the time. Quite simply, it is the funds you are willing or capable of investing in your business and business growth without knowing when you may see a return.

This is where I have seen most business owners come up short. Somehow they assume that magically there will be enough profit in what they do to support business growth.

Starting your own business is a great challenge. But, running a business in a manner to where it can grow is an even bigger challenge.

In the beginning most businesses spend more money on start up and the first few months than anticipated. This leaves them short of capital to invest in the business. As a personal business coach I can assure you that it is a very good idea to have a budget.

This way you know in advance what to expect and hopefully have contingency plans if things, as they usually do, don’t work out as intended. If you don’t have extra capital or know where to get it then you really don’t have a plan for your business growth.

Small Business Growth-It Depends On Capital

As a personal business coach I have observed that the number one killer of small businesses and the dreams that they represent is lack of capital. Very often small business will start out and be growing.

Yet, the funds aren’t there to help build the processes and structure to support the growth After the unforeseen expenses and unexpected needs there isn’t much left over for business growth.

This is a problem for several reasons.

If you can’t fund growth, your level of service or the product quality that enabled you to grow diminishes.
When your level of service or product quality diminishes there is a decline in customer confidence.
With a decline in customer confidence there starts to be a decline in business.
If the decline isn’t addressed early on then the business gets a bad reputation and then business growth goes from a hill to climb to a mountain that cannot be scaled.

Small Business Growth-Have A Capital Plan

For all self-employed business owners entrepreneurs and solo professionals it is important to have a capital plan. Some sources of capital can be a bank, the Business Administration or private investors. I caution against private investors. At a bank maybe you can set up a line of credit. The Business Administration has some good loan programs.

If you have a receivables problem there is factoring. There are also business capital sources outside of banking. There are business capital companies that can help you set up business lines of credit or use your assets as collateral for growth capital. They can also help you set up leases and this can improve your balance sheet.

The key is to have a plan before you start your own business Know your options when it comes to capital. When you know your options you are much more likely to achieve the success and business growth you desire.

Common Reasons for Small Business Failure

Why Many New Businesses Fail – Four Common Reasons of Small Business Failure

You may have already heard many stories of how people started a business with much enthusiasm but fail to run it successfully for a long-term. The failure of a business has, in my opinion, nothing to do with your luck or any other spiritual powers. There are a few common reasons of small business failure and I have written some of them in the following headings;

1: Poor Market Research

It sometimes happens that you wake up from your bed at 3 a.m and say to yourself ”wow, this is a multi-million dollar business idea”. Lame! Multi-million dollar business ideas do not simply pop-up into your mind while you are sleeping; instead they require a hell lot of market research to assess whether your business idea is worth a million dollars or not. Making a million dollars is not as easy as you think.

Poor market research plays an integral role in small business failure. People forget to gather useful data from the market which, in real terms, ensures success. They overestimate the potential of their product/service to sell in their target market. So, before you spend a single penny on your business, conduct a detailed market research.

2: Poor Business Planning

I have seen people who grab a page or two from their pocket and say, ”this is my business plan”. You are pretty much sure about the reaction that occurs on your face when someone says so. You’re right! Another reason why people fail to make their business successful is that they do not draft a proper and well-researched business plan. Warning: do not waste months on preparing a business plan rather than actually doing anything.

A business plan will help you draft a map of how your business will meet its objectives. You will address all operational areas of your business before actually starting anything; this will ensure that you are well prepared for any surprises that come your way. I have covered a diverse range of topics related to business planning in my blog and hope you will find them helpful. While preparing your business plan, all you need is to be honest and realistic about the projections and assumptions you make.

3: Limited Start-up Capital

Another common reason for most business failures is either they start with little start-up capital or they spend the available capital on unnecessary luxuries such as buying expensive furniture, expensive graphic designs for your websites, hiring more people than required, expensive marketing campaigns etc. It is always important that you prepare for running the business at breakeven (or even loss) for at least the first year of operation. The available capital shall be used in necessary and value adding items.

A business plan will help you develop a forecast of how much capital do you need to start your business and what is actually necessary at the start. Spending wisely in the start will help you sustain for a longer period as well as prepare you for hard times.

4: Synergy between Team Members

This is another common reason causing many new businesses to fail. Unless you are a single proprietor or a professional offering your services, you need to team up with people. You may also have co-founders who are with your from the scratch of your business. The team members and their synergy among each other play an important role in the overall success of your company.

Be careful when you select your partners and other team members because they will be playing a key role in your business. There is a need of people who have technical knowledge about your industry as well as those who are good in other business operations.

I hope the above reasons have helped you in understanding how you should start initially. There are many other reasons to a business failure that can be written here but these four reasons are in my top list.

Picking The Best Time To You Sell Your Business

When marketing a business for sale you will want to get the best result possible. So when is the best time to sell so as to achieve the best realisation of the value of a business?

When Should You Sell?

You are likely to get the best price for your business at the point when its growth prospects appear highest. The growth prospects of your business will appear best when:

- your company’s business is growing (has been growing strongly and has prospects of strong future growth);

- your industry is growing; and

- the outside economy is growing.

Ideally therefore, you want to be selling at a time when your performance is good and your prospects are better.

It is a fact of life that many entrepreneurs are attracted to high growth industry as an expanding market offers easier opportunities to create a new business. What you must bear in mind however is that every high growth industry eventually settles down to a much lower rate of growth which cannot support new entrants into the market and often cannot support all of the existing players. Therefore many sectors, from skateboard shops through to nursing homes, golf clubs, and mobile phone shops, will show periods of high growth with large numbers of players entering the field only to have a ‘shakeout’ as the rate of growth declines and the less successful players go to the wall.

In buying your business, purchasers will be putting a value on the prospects of the business.

When picking your moment to sell therefore, it pays to ‘leave something in it for the next man’. Remember that selling a business is a process that will take some time. Many entrepreneurs are tempted to hang on into a growth industry, attempting to squeeze every drop of growth out of the business and aiming to sell right at the top of the curve.

The danger with this approach is that you just might be very lucky and sell out at exactly the right time. However, bear in the mind that the sales process will take several months to complete, from start to finish. The chances are that you will not be successful and will miss selling right at the peak.

The point to note here is that the value of the business sold when it is on the up in a high growth phase is likely to be much greater, or as great as the value of the business sold at the peak as growth starts to tail off, because the business during the growth phase will be being valued on the basis of continuing growth as perceived in the marketplace; whereas the value of the business as the market flattens out may be valued on greater absolute earnings, but potentially at a much lower multiple due to lower growth prospects.

Moreover, if you wait too long in the business’ lifecycle and the market starts to decline, the value of the business will be based on a deteriorating growth prospects which will be reflected in the multiples achievable.

You should review your business every six months or so and consider whether now is a good time to sell. In fact, asking yourself the question: ‘Would people want to buy my company?’ is a good test of whether you are generating value or not. Because if the answer is ‘No’, what does this tell you about your business?

Keep an eye, therefore, on the value of your business and the rate of growth of it, its industry and economy in general.

So What If You Need To Sell But Your Business Is In Difficulty?

If your business is in difficulty, if you attempt to sell it you will have to accept that you are unlikely to get as much for it as you would if it was in good health; since as a distressed seller or someone selling a distressed business, the value you are likely to achieve for your business will be low.

Therefore, if your business is in difficulties, in order to improve the price you are likely to achieve, it is usually best to attempt to turn it around first so as to be able to market a business with a better current trading performance and future prospects (a process sometimes referred to within the turnaround profession as ‘polishing the pig’).

If your business has become quite severely distressed, and in practice would fail one of the tests for insolvency set out in the Insolvency Act 1986, in that it is unable to pay its debts as they fall due or that its liabilities exceed its assets, then there are further problems in attempting to achieve a sale.

These are, that in the event of a liquidation, the insolvency practitioner who has been appointed will have a duty to look at transactions during the period leading up to the insolvency, particularly those undertaken when the company was technically insolvent, to see whether any of these should be reversed.

In particular he will be looking for transactions at undervalue where he is able to argue that an asset has been sold off cheaply (such as you have sold the Rolls Royce to Joe, your brother, for £5 the day before the liquidation), or preferences, where he is able to argue that you have acted to put one creditor in a better position than others (such as you have paid Joe, or have transferred assets to him in settlement of his account prior to the liquidation, when you have not paid other creditors).

Thus, any sale or transfer of a business’s assets in the period leading up to a liquidation may be subject to a challenge in the courts by a liquidator. They may also feature in the liquidator’s report on the directors’ conduct prepared for the Government’s directors disqualification unit on which they may decide to bring proceedings.

So in summary, when you want to sell your business, choose your moment to sell, do not have it forced upon you. Be proactive about deciding when you want to sell your business and never allow yourself to become a forced seller of your business as a result of economic or other reasons. If you do, you will achieve a worse price because firstly, you will not be selling at the most opportune moment to maximise value, and secondly, because anxiety will force you to accept lower offers than you would otherwise consider.

What Business to Buy

There’s a twofold answer to the question ‘What Business to Buy’ simply because in its’ core it involves two aspects: You and The Business.

At first it is all about Your Skills, Knowledge, Experience and Interests. When looking for Opportunities in Business You are a fundamental Part of the Process. Make list to narrow down personal interests, traits and characteristics and look for a Business that suits these traits. Most of the time when entrepreneurs buy Businesses that don’t match their Temperament, they end up unsuccessful, unhappy and selling the Business.

Ask yourself the following questions to get Your Ideas for Businesses:

What are my 5 Strongest Personality Traits? You can also opt to ask your Friends and Family to send you lists with their observations (can be very revealing).
What are my 5 Strongest Skills when it comes to doing my current or previous jobs?
What Role do I want to Play in the Business?
What Destination and Location do I want my Business to have or can it be a Business without a fixed Location (such as internet based).
Do I prefer a large-scale Business with many contacts and customers or do I prefer to focus on a niche market, dealing with a smaller number of contacts and clients?
Do I want a Product Supply Type of Business or a Service oriented Business?
What is my Business Investment Budget?

When going over all the answers to these questions, you will have a Clear Picture What Type of Business you want to Buy.

Find a Business to Buy

After having identified What Type of Business you want to Buy it is time to Find a Business to Buy. You will want to opt for a Business that offers Value for Money. Its Valuations have to be backed up by Reliable and Detailed Financial Data.

Some Investors are Buying Businesses because they are Cheap compared to their core Value. They believe that as long as the Market undervalues the Business relative to the core Value, they are making a Solid Investment. This way of Investing fully depends on the reasoning that the market will eventually realize it has undervalued the Business and will correct its Course.

Below some questions you can ask yourself when determining What Business to Buy:

Does the Business Match my Personal Characteristics and Expectations?
Is there a Solid Business Plan available?
What are the Top-5 Competitors of the Business?
Do I have access to all Detailed Financial Data?
What is the Trend in Profits over the last 5 years?
Does the Business show healthy and consistent cost margins?
What is the expected Return on Investment?

How much you will eventually profit from your Business depends on the level of Original Investment and Your Management and Marketing Skills.