The numbers-loving sidekick to your strategic plan
At Design Thinking for All, we talk a lot about strategy and strategic decisions. (see our current series on Creating a Strategic Plan). We also talk about design thinking tools and techniques, and how they can help you consider your idea, organization, or approach, in more depth and with more empathy. One area we don’t talk about as much is business models. Building a solid business model is one of the most important activities you can go through as a business owner or leader. Whether your business is a startup or a mature one, operating without a clear understanding of the various levers that drive its performance is unnecessarily risky–especially when it is relatively simple to create a basic business model.
What is a Business Model?
Think about your business model as the numbers-loving sidekick to your strategic plan. It helps you evaluate your company’s performance objectively and make better decisions–both in the moment and in long-term planning.
For purposes of this discussion, a business model requires consideration of various financial aspects to ensure profitability and sustainability. While the level of detail, timeframes, and formats can vary widely, there are some essential components that most business models share.
- Revenue Streams and Pricing Strategy: Develop a comprehensive understanding of your revenue streams and your pricing strategy. Accurate financial modeling here is essential to determine how your pricing choices impact your bottom line. (A good overview of pricing strategy can be found here.)
- Cost Structure: Delve into the detailed breakdown of your cost structure. This includes both fixed costs and variable costs. Effective financial modeling will help you identify areas where cost optimization is possible.
- Key Metrics: Your financial model should incorporate essential financial metrics such as profit margins, return on investment (ROI), and cash flow projections. These metrics provide critical insights into your business’s financial health.
- Scalability and Growth Projections: Financial modeling plays a pivotal role in assessing how your business can scale and grow over time. It helps project financial requirements for expansion and diversification.
- Risk Assessment: In financial modeling, it’s crucial to quantify and analyze potential financial risks. This enables you to develop strategies and reserves to mitigate financial setbacks.
- Cash Flow Management: Forecasting cash flows accurately is central to financial modeling. It ensures you have the liquidity needed to cover operational expenses and seize growth opportunities.
If all of this feels a bit daunting, know that you don’t have to tackle everything at once (or even have all of these components.) At a minimum, most small businesses should focus on their cash flow, sales, and expenses when starting to forecast.
Business Model Canvas or Lean Canvas
In design thinking, we often use the Business Model Canvas, made famous by the firm Strategyzer, or a refined version called a Lean Canvas, to document our initial business model. Here is the Lean Canvas:
If you have done one of these already, they can be a great starting point for your more detailed business model. If you haven’t, consider starting here, and then going deeper, as illustrated above.
Using a Business Model: Scenario Planning
Once you have this foundation built, you can leverage your model to help you make informed decisions, uncover opportunities, and evaluate scenarios. For example, what would happen if we sold 400 more cupcakes per month? Or, what if we reduced our rent by 11%?
Taking it a step further, you could build out more robust “what ifs” by engaging in scenario planning– which is basically running a financial model based on a potential future.
Scenario planning requires you to think through these questions:
- First, you ask yourself, “What could possibly occur?” That’s the scenario part.
- Then, you work through, “What would be the impact on my business if that thing happened?” Most of the time, you’ll have a “best case,” “worst case,” and “most likely”
These will be educated guesses with “t-shirt sizing” accuracy, but once you understand the likely range of outcomes, you will be better prepared to pull the levers that move your business towards the “best case,” seize opportunities that arise, and make the hard necessary decisions. And you will be able to estimate the impact on your bottom line.
At the end of the day, a business model and any scenarios you build are just tools. You still need to create value and have a strategy. Solving customer problems, solid execution, and a compelling value proposition will always be the bedrock for your business success.
A solid business model will give you an understanding of what drives financial results for your company. This understanding will provide a better foundation for making decisions and more confidence to focus on what truly matters to your customers and employees.
This newsletter features Mike Anderson, consultant, entrepreneur, strategist, and co-founder of Upstream Consulting. Upstream Consulting specializes in general management and customer experience consulting, with an emphasis on small and medium-sized businesses in the Richmond, VA, area. They leverage their unique and varied skills to help you solve your most important business problems.
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