The All Important Business Model

An old friend who has banked tens of millions of dollars over the years from a pretty simple business likes to say he's never had a so-called business model, adding that all he did was take care of customers. While talk about business model can be misguided, all businesses have a model, elements of which make them by definition a specific business. My friend studiously served his customers, but always profitably for consistent and very meaningful cash flow. His industry is very depressed right now, but he still produces positive cash flow. He has a good business model which he understands very well and executes wisely.

Business model elements usually start with potential customer need which helps define product or service, then goes to demand which helps define volume and price, which multiply into sales or revenue. But the business model importantly includes cost which yields gross margin, then all other expenses required to incur the costs and produce the sales, which combine to produce the income or profit and all important cash flow. I'll never forget hearing Al Shugart talk about cash being more important than your mother.

Add capital requirements and necessary measures of ROI and you have the essential elements of the business model or business formula or recipe for success. Any one element or factor can make the difference for good or ill, but it is ultimately the combination that counts most. The cost factor includes the pivot point of supply. Volatility of supply volume or cost, like volatility of demand volume or price, can create major challenges to overcome. Quality of product and service relates to both cost efficiencies and price/demand effectiveness.

The ultimate expression of the elements of the business model is the vision of the company strategically instilled into the minds and hearts of an enlightened leader-inspired self-directed organization.