Show Me The Money! 9-Steps To Use Financials With The Business Model Canvas
Since the publication of Business Model Generation in 2010, the Business Model Canvas (BMC) has spread like wildfire throughout the business community. No matter where you go, if you’re near business people, business students, intrapreneurs and entrepreneurs, you’re bound to see a BMC posted on the wall of a meeting room, classroom, or studio. Inasmuch as the BMC has helped literally millions of people design better businesses, many are often left asking, “where’s the money in all of this?”
I often see people struggle with financials. Either they make it too complicated and build extensive excel spreadsheets, or they are so in love with the value proposition, they completely ignore financials. As for the first part, complicated spreadsheets, that only works for an existing business, where everything is a fact. If you build a new (line of) business, the bigger the spreadsheet, the more assumptions you have. It won’t give you more certainty about the results and it will be hard, if not impossible, to understand which financial element triggers what. Ignoring the financials is also not a good idea. If you can’t see the potential financial value early stage in your idea, you certainly won’t find it in a later stage.
In the following article we’ll show you how to add financials – yes, real numbers! – to your own business model that would make any analyst jealous.
Step 1: Design Your Business Model using the BMC
Sounds simple enough. If you want to use the BMC to help you figure out where the money is in your idea or business, well, you’re going to need to first model that idea or business using the BMC. But, beware. This is NOT about filling out the nine boxes. This is about intentionally designing a business model that tells a story in a comprehensive way. Remember, the BMC is a tool that is meant to show how a business works back to front, in a systematic way. Filling out boxes mindlessly won’t help with this.
Step 2: Link the Golden Triangle
Any good, well run (sustainable) business, whether it’s for profit or not for profit, will have three things going for it: at least one customer segment, a clear value proposition, and at least one revenue stream. Don’t see one of these on your own BMC? Keep designing. When you connect these three elements you get what we like to call, The Golden Triangle. Yes, everything else is also important. But, The Golden Triangle is absolutely fundamental. Think of this as the beginning of your business’s story: you create some value for some customer whom in return gives you money for the value you delivered to them. Have more than one customer segment? Fine, model that too. Just make sure that for every customer segment there is a clear value proposition as well as a matching revenue stream. We like to make a clear delineation using different colors for each triad in the triangle.
Step 3: Identify the Market Size & Market Share
When designing your business model, your customer segments should represent clearly definable, defensible markets. For instance, if you believe ALL electronics consumers are on the market looking for your value proposition, you’d better have a good way to defend that. By the way, there is NO product available in the world that targets every single consumer on earth – though, not for lack of effort by Facebook, Google, and Apple. More likely, there are clearly definable customer segments that you serve. When you design for these you’ll be able to find plenty of market research giving you the addressable market size for these customer segments. Add those numbers to the business model (via a sticky note). Once you’ve done that, add another sticky note that shows what percentage of the total addressable market (TAM) you believe you’ll be able to capture. This is your market share.
Step 4: Estimate the #s and $s of Your Business’s Transactions
Once you have an idea about how many customers makeup the market share for your value proposition(s), you’ll need to come up with an estimate for how often they purchase from you (daily, monthly, yearly, etc.), the quantity that they purchase from you for each transaction, as well as the price they pay. Do this for each revenue stream. Once you have this down, within each golden triangle, multiply the number of customers in that customer segment that will by from you by the quantity they’ll purchase by the price. This is the total revenue for any product/service (i.e. value proposition) for the period you chose (daily, monthly, yearly, etc.).
Step 5: Estimate Investment Needed
Unless your business is already running it will probably require some investment to get it off the ground. Using the elements you applied to your cost structure, add some sticky notes for the investment (in cash) that you’ll need to start your venture. These are ONE-TIME costs and not running costs. So, be sure to note that.
Step 6: Estimate Running Costs
When you modeled your revenue financials, you did so using some defined period (daily, monthly, yearly, etc.). Now it’s time to use that same period to estimate the costs of running your business. To do this, just as you added some numbers for estimated investments needed, add another number representing the estimated costs (in cash) for each element in the cost structure. A helpful way to understand if you’re on the right track is to link each key activity, key resource, and key partnership back to some element in the cost structure box. In other words, what’s it going to cost you to do the things you need to do to make your value proposition true every day/month/year/etc. After you’ve done this, it’s often also helpful to add up all of the costs, including investments, for the first period to understand what your total cost outlay will be.
Step 7: Define Your Critical Financial Assumptions
Whereas many people at this point might think they have a well-designed business model with included financials, you’re not like many people…are you? As a designer you understand that your business model, especially the estimates you added are simply assumptions at the moment. So, at this point, you’ll need to really try to uncover which are the most critical assumptions to making your business model fly. An easy way to do this is to try to break each of your numbers down into smaller pieces. For instance, if you’re building a hardware widget, what’s makes up its bill of materials (BOM)? Which customer segments are you really reaching for but don’t exactly know if the numbers are right? Break those down into smaller groups outside of the BMC to determine how you might go about validating your value proposition with them.
Step 8: Test Your Critical Financial Assumptions
Once you’ve identified all of the critical financial assumptions, now it’s time to go out into the world and test them. This very likely means that you need to speak with other people that have access to actual costs associated with your business model. Just as importantly, you’ll need to design some ways to test customers’ willingness to pay what you modeled in the first place. Whatever you do, take this step seriously. The difference between flying and flopping is often in the numbers. Getting them as right as you can is essential.
Step 9: Translate Your Business Model (Financials) to the Upcoming Years
Finally, you’ve reached the end of your financial modeling exercise! Or have you? Well…unless your business is ONLY setup to run for one year (or one period), you’ll want to do some forecasting to help you (and others) understand where it will go in the future. To do this, design business models for the upcoming years. We like to call this the Z Axis (i.e. time).
And that’s it! Once you’ve done this a few times, you’ll find it gets easier and easier to model what should be a sustainable business or perhaps find that it’s not sustainable at all (which is not a bad thing either if found up front). What’s more, as with any design exercise, you should do this with a team of people. While on your own you may be able to model some financials pretty quickly, when done with a team you’ll more than likely find that the numbers will be more accurate.
Curious to hear from you what your struggles are related to adding financials to a business model. Let me know what you would like to learn more about! Contact me by e-mail.