The need to run the business model numbers

When considering a new business model, proponents must first conduct a qualitative review, that is, determine whether the story behind the model makes sense. There must be a logic behind the adoption of the model and a compelling case that it will be endorsed by your target audience.

Once the qualitative review is complete, it is essential that a comprehensive quantitative review be carried out. Our experience is that too many business owners and managers ignore this vital stage of business model assessment. Unfortunately, many believe that the hard work is done once they have established a credible story about how they will make money from their proposed business or project.

For every possible business model, there is a unique set of variables, both technical and financial, that will impact business performance. It is not enough to test the movements in one key variable at a time. When testing new business models, it is imperative that any combination of key variables can be tested simultaneously and quickly to assess the likely impact on financial performance. This can only be achieved by using a custom built model that has been designed for this purpose.

Financial projection models

A crucial first step in designing an appropriate financial model for this purpose is the identification of all the key drivers that underpin and variables that may affect the financial performance of the proposed new business, business unit, or project. This process is also crucial when contemplating an expansion, merger, or acquisition. Comprehensive, sophisticated, and customized financial projection models must then be designed and built to incorporate these drivers and variables in order to project likely financial performance over a selected period, typically five years, and assess financial viability.

Done correctly, these financial viability assessment models can become valuable management tools that can be run repeatedly to project financial performance by month and year under all anticipated operating circumstances. Of particular importance, cash flow patterns can be mapped and analyzed to identify probable maximum cash requirements under all contemplated scenarios, allowing for timely planning of debt and/or equity financing requirements.

All businesses differ in the scope and range of variables that are likely to have an impact on financial performance. Comprehensive, well-designed, and well-constructed financial models must be able to easily and repeatedly test the effects of changes in all variables that may have an impact on the financial performance of the investee company, project, or entity. Importantly, they should also be able to test all relevant permutations and combinations of sets of relevant variables, and estimate the effects of deviations both upwards and downwards from the predicted scenario.