Ok so you are tired of working for “the man” and are ready to take a chance and do your own thing. Where do you start? In my career I’ve worked with countless small business entrepreneurs. All of them are talented, extremely driven to succeed and frustrated that things aren’t happening fast enough? They’ve got the idea and it works. Clients are paying for the good or service. Revenue is up which requires running at a faster pace and stressing the machine. All of the hard work will be worth it right?
Why maybe? The answer is maybe because if we don’t have a business model to follow, we will not be able to definitively say we are making money currently or will make more in the future. Bigger isn’t always better and smaller doesn’t always get the job done. Business Models for a one person show isn’t the most difficult thing to keep an eye on which is why a lot of entrepreneurs choose not to build one. Unfortunately, if you are planning to become successful, your business will have to become much more complicated and a model is the only bedrock that will allow you to make future decisions with any degree of certainty.
Think about it…
In business, the bullets will begin to fly sooner than later and you must have a point of origin to guide you when things begin to happen.
While it’s common for a bank, partner or investor to ask for projections when you are looking for financing, a business model is purely for the owner and you should consult yours on a daily basis.
A business model is essentially the formalized plan emanating from the entrepreneurs original flicker of an idea. There are many ways to construct a model with many different elements depending on the complexity of the idea and they are living creatures that evolve over time as the business grows.
A business model is essentially a document that formally answers every question about a business. Here are some examples of questions that need answered before you should ever decide to open your business:
Each and every one of these questions will arise much faster than you think. It’s imperative to answer them in writing before you open your doors. When I started my business 13 years ago, I made a plan. Many unexpected things have happened since we opened. Any one of them could have totally derailed the train but we worked through them with the help of the guidance of our plan.
I believe that most people don’t build a model for a few reasons:
1) They don’t see a need for it because they have their plan in their head. Actually, they think they have the plan in their head. Have you ever failed a test because you thought you knew then answers and then the teacher tested you by making you write down what you thought you knew? Yeah...me too.
2) Nobody has asked them for it so it must not be important
3) It’s difficult and uncomfortable to write down a laser focused answer for all of the questions listed above.
4) They lack the technical skills to complete the entire plan. Some people can dream up the idea but can’t do the math. Some people can do the math and tell you if the idea will work but lack the social skills to ever dream of selling anything. We all have piles of head trash clogging up our minds on a daily basis and any negative feeling we have towards ourselves can stop a promising plan in its tracks.
All of these reasons are wonderful excuses not to make a model but none of them are going to help you when things are upside down and you have nowhere to go for answers. Humans are emotional creatures and entrepreneurs tend to become very emotionally connected to their business. When things aren’t going well, the feelings will feel like facts but they aren’t. Feelings ARE NOT Facts. The business model is where you will return to determine the facts. Without it, you’re relying only on feelings to get you through. Good luck with that.
The first benefit of a model is that it forces you to take what is in your head and write it down. This will flush out a lot of generalities as we will be required to be specific.
The second benefit is that the financing world tends to ask what we intend to do with their money before they give it to us.
The third reason to have a model is for day to day use. How do we use a model? I’m glad you asked. Your model will consist of descriptions of things like how you will market or when you will ramp up labor and will even estimate what you plan to pay for insurance or utilities. We in the biz call this a cash flow. How much comes in? What does it cost to provide your good or service (cost of goods sold) and what other fixed costs need to be paid? We get money….pay to sell the good….pay the fixed cost….pay the taxes on the earnings…..AND THEN we get to keep some money…..maybe.
On day 1, the cash flow model just tells us if we think we have a good idea. It allows us to slot in known expenses like rent, or a business loan payment. Once you are rolling, you should regularly check your sales and your expenses and enter them into your cash flow. Can you just skip this step and get an accounting report once a month to see how things are going? You can absolutely rely on your bookkeeper to tell you how you are doing. Unfortunately, I’ve found that this tends to put you months behind the curve in a small business. Additionally, a cash flow will allow you to project future ideas.
What if we spend x to advertise?
What if we pay off a loan?
How much more revenue can we project if we hire one more sales person?
What does that mean to the bottom line?
Does our most expensive employee who happens to be a diva pain in the butt make us the most money or could we improve the company by cutting them loose?
Are we ready to rent additional space?
Lastly, the cash flow and business model serve another very important purpose. They remind you that you aren’t crazy when you start feeling badly about how things are going. Someday you will have an employee quit, rent will go up, you’ll have a bad month of sales or your trash bill will go up $50. It’ll feel like things are going backwards and they will never get better. It’s at those moments when you’ll go back to your plan and your results to date and you’ll feel better after you realize that you are doing 20% better than you were last year.
By building a model, it forces the owner to confront many important issues before they are in over their head and drowning in a sea of excessive expectations. Horror stories of owners spending 12 hours a day at work 7 days a week just to get the bills paid are the result of bad models. Entrepreneurs with failing models have completely missed the freedom train and are now on the slow boat to a lifetime of servitude.
Getting the business model right is an absolute must for any entrepreneur. It will act as your guide and your light in the darkness when things don’t go as planned.
If you would like to talk more about getting your business model down on paper and perfected, I'd love to hear from you. I've set aside time in my schedule over the next couple of weeks. Just click the link below and book your complimentary strategy session.