|
Test Your Business Model
A great way of evaluating your business is to test the business model. Based on your findings it is likely you will end up making some significant changes that will result in a better business.
In this instance the word “model”, though commonly used in this respect, is perhaps not the best way to describe the concept. Business “formula” is probably more appropriate. That is, the formula of the key components that make up the business.
What are these key components? Well, they vary from business to business, but typically they are:
- The target market and marketing mix;
- Products and/or services produced or supplied relative to the target market;
- Gross profit margins;
- Key expense to sales ratios;
- Risks and risk management;
- Owner’s skills and capabilities;
- People requirements and availability;
- Asset needs and availability;
- Cash flows;
- Funding ratios;
- Required return on investment to the owner.
When testing the model we are looking for the areas where the business is strong, and where it is weak. Once identified we simply enhance the strengths, and eliminate the weaknesses.
This model testing process will uncover some hard truths. We have seen it result in major surgery in terms of changing a business. Sometimes it will result in the owners realising that the model they are working with simply cannot succeed.
A final comment. Testing the model will be more effective if you have an outsider assist in the process. It is too easy to either accidentally, or deliberately avoid the real issues if the process is undertaken in secret.
|
