Basic Business Questions Every Business Should Answer
Are you in the black?
The practicalities of the finances of the business MUST be uppermost in your mind. Getting a solid grip on your income statements, balance sheets, cash flow, budgeting are essential to allow you to make or break your company’s future.
Before this a more pressing question is to work out and identify where you income will be coming from. Key questions include – Who will pay? How much? How often? And what portion of every sale will be your profit?
Some basic principles;
- In the black: If your revenues exceed your costs, you’re in the black.
- Red ink: If you’re not in the black, your company is losing money, which means that you could be drowning in red ink.
- Fixed costs: Your business will have plenty of costs some of which do not change and need to be paid on a regular basis regardless of how the business is performing. These are fixed costs or overhead.
- Variable costs: Other costs, called variable costs, fluctuate with your sales volume. They include the materials that go into producing your product or service.
To keep out of the red ink, you need enough money coming in to cover all your costs. But to break into the black, you need to price your goods and services to cover your costs with a profit put on top of this otherwise you will be working for nothing.
Timing your future
How you expect to make money is one part of your business model, but when you expect the money to arrive is a critical success factor for the business. Some companies run up costs and spend cash months (even years) before a revenue stream begins to flow. For that reason, your business model must include a timeline that takes the following into account:
- The upfront costs you expect to incur when setting up your business
- The source of funds to pay for your upfront costs
- A schedule showing when you expect revenues to pour in
Get the timing wrong and your business will fade away and die before it even has a chance to get going. Even large multi-nationals have this problem.
Knowing how customers pay
An effective business model also takes into account how customers pay. When customers buy a product or service, they typically have a number of payment options. The most common choices include paying in one lump sum or spreading the purchase price over monthly instalments. In some businesses, customers also have the choice to pay as they go or to prepay for unlimited use of a product or service. Other times, a company invites customers to buy or to rent, to finance their purchases, or to lease products instead of purchasing them.
Each option has financial consequences that affect your business model. As you establish the purchasing options you plan to offer customers, consider how each selection will affect your revenue picture.
Design and deliver a successful business model
Some business models have a long and successful history attached to then while others are brand new, untried and relatively high-risk.
The most basic model involves creating a product and selling it directly to customers. Other models involve selling wholesale to retailers, selling through distributors, licensing products to other companies, selling online, selling through auctions, and countless other alternatives. In the competitive environment in which we live there is no simple solution and many businesses have a variety of channels which they use to sell and generate profit. The trick here is to keep an open mind on the exact structure that you will use and prepare to modify your approach as opportunities come along and as the market dictates.
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