Focus on your Business Model BEFORE your Business Plan

I attended an informative and fun conference yesterday – the Women’s Leadership Exchange meeting in Long Beach CA. One presentation caught my attention. Given by Beth Polish of The Critical Junctures Group LLC, it opened my eyes to the difference between a business model and a business plan.

At the risk of sounding like an economics professor (which I am NOT), I understood from Beth that the real goals of a business are: generate profits, generate cash and generate a return on assets.

In her view, a business model is a profitable SYSTEM to generate cash and a return on assets. A business plan is the ROADMAP to implementing the system. If this is sounding a little jargony, I hope I can help.

To avoid doing what I did when I began coaching, which was get trained and simply “open shop”, without any clue about what I was trying to accomplish beyond keeping busy, you’ll need to figure out what your system (business model) will be, to accomplish the three goals.

Here are five questions to answer, to help you decide if you have a viable business model.

1. What are your revenue sources?
Will you derive revenue from a single source e.g. selling products, or from multiple sources e.g. consulting hourly fees and sales of your workbook or “how-to” CDS? 
2. What are your cost drivers?
Which costs are “fixed” – they’re there no matter how many clients you serve or widgets you sell (e.g. office lease)? Which costs are “variable” – they fluctuate depending on how many items you make, programs you write or clients you see (e.g. raw materials, office supplies or programmers hours)?
3. What capital do you need to run your business? Where will the money come from to make one-time investments e.g. your computer system or build-out? How will you fund your ongoing operating costs, such as marketing, rent, salaries?
4. What are your critical success factors? If you want to succeed, focus on the things that make a difference. Sounds obvious, doesn’t it?
Critical success factors can vary; from numbers of members if you have a “subscription” business model, and timely fulfillment of orders and handling returns if you sell products, to customer satisfaction and referrals for service businesses. It is important to understand what you must be paying attention to, and even measuring, to decide if your business model is viable.
5. What are the risk factors? Again, these vary depending on the nature of your business, and can be thought of as internal (e.g. recruiting challenges because you don’t have enough money to pay salaries) or external (you need to get your product made somewhere in Asia and currency fluctuations are making it hard to set a price).

If you are thinking creating a business plan for an idea of yours, here's a suggestion -  Sketch out your responses to the above questions as best you can and then consult with a business-savvy friend or professional who can help you flesh out the details and poke holes in your scheme, before you sink a lot of money into it.

Update on Thursday, November 2, 2006 at 04:45PM by Philippa Kennealy

I do want to make it clear that these 5 steps and questions I have listed here derive from what I gleaned from Beth's class - she gives a much more elegant descrition of the principles than I.

In addition, for a primer on how to raise money effectively, read her book "In the Market for Money".