reflection paper
tiantian 123
ENTR442BusinessModelAnalysis.pptxBusiness Model Development
ENTR 542
Questions Every Entrepreneur Should Ask
1) How likely is the business to turn cash flow positive?
2) How much time is required to ramp-up the revenue in order
to turn cash flow positive?
3) How large an investment is required to pursue the business model?
4) What are the critical success factors and associated risks?
Business model defined
a summation of the core business decisions and trade-offs employed by a company to earn a profit.
(Hamermesh, et.al., 2002)
Business model defined
a summation of the core business decisions and trade-offs employed by a company to earn a profit.
(Hamermesh, et.al., 2002)
What purpose does this definition serve?
Decisions and trade-off categories
Revenue sources
Key expenses
Investment size
Critical success factors
Revenue sources
How many different revenue streams will the business model generate?
What is the source of each revenue stream (sales, service fees, advertising, subscription)?
What is the relative size and importance of each revenue stream?
How quickly is each revenue stream likely to grow?
Underlying revenue streams
Single stream: company relies on one predominant revenue stream stemming from one product or service.
Multiple streams: company collects multiple revenues streams from different products or services. Each revenue stream is sizeable enough to have a meaningful impact on profitability.
Interdependent: company sells one/several products or services in order to stimulate revenues from another set of products or services. Examples of interdependent revenue streams include razors and razor blades or printers and printer cartridges.
Loss leader: company collects multiple revenue streams but not every revenue stream is independently profitable. One or several revenue streams may serve as loss leaders and drive trafficto spur other purchases.
Revenue models
Subscription/Membership: Customers pay a fixed amount at regular intervals (week, month, year) in advance of receiving the product or service. Examples include paying an annual subscription fee for a magazine or a fitness club membership.
Volume or Unit-Based: Customers pay a fixed price per unit and receive a product or service in exchange. Examples include retail operations such as a restaurant, clothing shop or beauty parlor.
Advertising-Based: End-user is usually exempt from paying a fee or pays a fee equivalent to only a fraction of the true value of the product or service. Examples include network television stations and content-based web sites.
Licensing & Syndication: Customer pays a one-time licensing or syndication fee to be able to use or resell the product. Alternatively, the buyer may pay a separate licensing or royalty fee in a business-to-business transaction, for example, a pharmaceutical firm may license a drug from a biotechnology firm.
Transaction Fee: Customer pays the company that facilitates the transaction a fixed fee or a percentage of
Revenue model analysis
Revenue streams
Is the business model based on a single, a multiple or a loss leader revenue stream?
If the company has a loss leader revenue stream, how likely are the losses to be covered by other revenue streams?
Revenue model
Is the business model based on a single or hybrid revenue model?
In the case of a hybrid model, what are the underlying revenue models (i.e. subscription, transaction, advertising)?
How quickly will the revenues increase? Are there any barriers to revenue growth?
How long does it take to collect cash following a sale?
Cost drivers
What cost drivers have the greatest impact on the cost structure?
Are the costs fixed, semi-variable, variable or non-recurring?
What is their relative size and importance?
Will the cost drivers change over time?
Cost drivers
Definition
A cost driver is any factor that affects total costs.4 In general, costs vary with either time or volume of output. More specifically, there are four primary types of cost drivers that comprise a firm's cost structure.
Fixed: Items of cost that do not vary at all with volume. Examples include annual rent, property taxes and management salaries.
Semi-variable: Items of cost that include a combination of variable costs and fixed costs. Therefore, a semi-variable cost varies in the direction of, but less than proportionately with, changes in volume of output. An example is the payroll expenses of a supermarket. A supermarket must employ a minimum number of staff to operate the store regardless of sales volume. However, as sales volume increases, more staff may be required to handle the increased business.
Variable: Items of cost that vary, in total, directly and proportionately with volume. Examples include materials cost (vary with total number of units produced) and sales commissions (vary with total number of items sold).
Non-Recurriny: Items of cost that appear irregularly or infrequently in the company's cost structure. Examples include investments such as purchasing a building or equipment.
Most common cost structures
Payroll-Centered (Direct): Semi-variable costs driven by employees directly involved in the output of the firm. Examples include professional services firms such as consulting firms and investment banks or manufacturing firms with assembly line production.
Pavroll-Centered (Support): Fixed costs driven by employees indirectly involved in the output of the firm. Examples include Haute Couture fashion houses or insurance companies.
Inventorv: Primary cost center related to maintenance of raw materials and/or finished goods inventory. Examples include manufacturing firms such as automobile manufacturers or retailers such as car dealerships or jewelry retailers.
Space/Rent: Costs driven by the high cost per square foot of office or retail space. Examples include a restaurant located in an affluent neighborhood or a service company such as copy centers located in downtown office buildings.
Marketing/Advertising: Costs driven by total marketing or advertising expenditures required to attract and retain customers. Examples include Internet content or commerce websites.
Cost driver analysis
Cost driver
Is the business model's cost based on primarily fixed, semi-variable, variable or non-recurring costs?
How much volume can be supported with the fixed cost base? How likely is a reduction in the fixed cost base of the company?
Are the primary cost drivers expected to change over time?
Cost center
What are the largest cost centers for the business model?
What is the relative size and importance of each cost center?
Do any of the cost centers deliver a strategic cost advantage?
Investment size
How much cash is required to launch the business model?
How much working capital is required to sustain the business?
What are the timings of these cash needs?
Will the cash expended produce a viable business entity?
Investment size: key considerations
Maximum Financing Needs: What is the maximum financing need of the business model (i.e. how deep is the cash trough)? Over what period of time is the investment required?
Positive Cash Flow: At what point does cash flow of the company turn positive? How long does it take to arrive at this point?
Cash Breakeven: When does the company achieve cash breakeven (i.e. what does time equal when the curve crosses the x-axis)? How does the slope of the cash curve change after breakeven?
Varied examples of investment size issues
Software: Large upfront investment is required to build an initial software product. If the product is successful, only relatively small follow-on investments in sales, distribution and customer service are required to capture a large software revenue stream.
Retail: Capital requirements during start-up phase associated with lease or rent costs, inventory and payroll. Financing needs remain relatively consistent over time.
Small Consulting Firm: Very small upfront investment for space, computer, and phone line are necessary to begin serving clients. If the firm is successful, larger follow-on investments may be required to hire additional staff, lease large office space and build IT infrastructure.
Critical success factors
Which elements of a company's business model are most important to achieving its profit goals?
Which of these elements are the most difficult to execute?
Will they change over time?
Critical success factor analysis
Construct a business model that illustrates the timing and size of the cash inflows and outflows.
Select three or four parameters (e.g., sales growth, new customer acquisition rate, inventory turns) with the greatest perceived impact on total cash flows of the business model.
Select a reasonable range for each parameter and then measure the impact of changing the parameter (across the entire range).
Repeat this process for each parameter and note which variables have the most significant impact.
The Company’s Financials
Starting point for business model analysis
Review of terms
Statement of cash flow
Income statement
Balance sheet
Pro forma (projections)
Break-even analysis
Debt coverage analysis
Source and use of funds
Framework for business model analysis
Determine the company's actual and projected revenues and the timing of the cash inflows. Disaggregate revenue data until you have uncovered the revenue drivers or the key factors that influence total revenues.
Determine the company's actual and projected expenses and the timing of the cash outflows. Disaggregate cost data into discrete cost drivers.
Determine the total investment required to achieve a positive cash flow position, including working capital.
Plot cash flow versus time to generate a cash curve. This curve will illustrate the maximum financing needs and the timing of positive cash flows and cash breakeven.
Perform a systematic sensitivity analysis of the business model to identify the critical success factors or the levers that have the greatest impact on the cash flows of the company.
