Pillars of a Great Business Model
Over the last 20 years, I've started 12 companies and have experienced much success and failure in the process. In times of reflection, I get to think about some of the best and worst foundational parts of a business model (just based on my experiences). Here's a quick read on a few incredibly important and valuable pillars of a business model.
1. Cash Flow Cycle
The cash flow cycle of a business is critical because it reflects the inflows and outflows of cash in a business over a period of time. Essentially, it represents how much cash is coming into the business from sales, investments, and financing, and how much cash is going out to cover expenses, pay off debts, and invest in new projects.
Here are some reasons why the cash flow cycle of a business is critical:
It helps to ensure business survival: Cash flow is the lifeblood of any business, and without a healthy cash flow cycle, a business may not be able to survive. A company that runs out of cash may not be able to pay its bills, employees, or suppliers, which can lead to bankruptcy.
It helps to identify cash shortages: A cash flow statement allows a business to identify periods of time when it may experience cash shortages. By forecasting cash flow, a business can plan for these periods and take steps to reduce expenses or secure additional financing.
It helps to plan for growth: A positive cash flow cycle can help a business plan for growth by allowing it to invest in new projects or expand its operations. A negative cash flow cycle, on the other hand, may limit a business's ability to invest in growth opportunities.
It helps to manage working capital: A cash flow cycle provides insight into a business's working capital needs. By managing working capital effectively, a business can reduce the risk of cash shortages and ensure that it has enough cash to meet its obligations.
2. Recurring revenue
Recurring subscription revenue is great for a business for several reasons:
Predictable revenue stream: Recurring subscription revenue provides a predictable and stable source of income for a business. This makes it easier to forecast future revenue and plan for growth and expansion.
Customer retention: Customers who subscribe to a service or product are more likely to continue using it than those who make one-time purchases. This creates a loyal customer base that can help to sustain the business over the long-term.
Lower marketing costs: It is generally less expensive to retain an existing customer than to acquire a new one. With recurring subscription revenue, the marketing costs can be reduced as the business does not need to constantly acquire new customers.
Improved cash flow: Recurring subscription revenue provides a steady flow of cash into the business, which can improve cash flow and make it easier to manage day-to-day operations.
Flexibility and scalability: Businesses that rely on recurring subscription revenue can be more flexible and scalable than those that do not. They can adjust their pricing and plans to meet the needs of their customers, and expand their offerings to include additional products or services.
3. Gross Margins
High gross margins are great for a business for several reasons:
Increased profitability: High gross margins mean that a business earns a higher percentage of revenue as gross profit, which can lead to increased profitability. This can provide the business with more resources to invest in growth and expansion.
Financial stability: A business with high gross margins is more financially stable than one with low gross margins. This is because the business has a greater cushion to absorb unexpected costs or revenue fluctuations.
Competitive advantage: High gross margins can provide a competitive advantage by allowing a business to offer lower prices or invest in research and development to improve products or services.
Better negotiation power: A business with high gross margins may have better negotiation power with suppliers, as they are able to pay more for goods or services without sacrificing profitability.
Flexibility: High gross margins provide a business with more flexibility to adjust pricing or discount strategies to increase sales volume without sacrificing profitability.
4. Sales Flywheel
A predictable sales flywheel is important for a business because it provides a framework for generating consistent and predictable revenue. A sales flywheel is a model that represents the different stages of the sales process, from lead generation to customer retention, and the activities that drive growth at each stage.
Here are some reasons why a predictable sales flywheel is important for a business:
Consistent revenue: A predictable sales flywheel provides a consistent source of revenue for the business. By focusing on the activities that drive growth at each stage of the sales process, the business can generate a steady stream of sales.
Forecasting and planning: A predictable sales flywheel allows a business to forecast future revenue and plan for growth. By analyzing past performance and understanding the activities that drive growth, the business can make informed decisions about future investments and expansion.
Customer acquisition and retention: A predictable sales flywheel helps a business to acquire new customers and retain existing ones. By understanding the needs and preferences of customers at each stage of the sales process, the business can tailor its marketing and sales efforts to meet their needs.
Improved efficiency: A predictable sales flywheel can help a business to identify inefficiencies in the sales process and make improvements. By optimizing the activities that drive growth, the business can reduce costs, increase productivity, and improve the customer experience.
