With many SMEs gearing themselves towards a February financial year end, the next two months will offer entrepreneurs the ideal time to objectively analyse their own and their business’ performance and growth. In order to position one’s SME for success, however, it is critical that owners understand exactly how their companies make money, as well as their potential to continue generating money in the future. This requires entrepreneurs to define appropriate models for their businesses, says Shawn Theunissen, head of CSR at Growthpoint Properties and Property Point (Growthpoint Properties’ enterprise development programme), in this month’s SmartProcurement.
While much enterprise development work is often focused on assisting entrepreneurs to develop business plans, it is equally important for them to project an appropriate growth trajectory for their SMEs by means of a business model – outlining exactly how they are going to make their individual business work and, at a very basic level, explaining how it’s going to make money.
“Because a business model combines the vision of the SME (the why) with the means of achieving this (the how), it’s critical that entrepreneurs take the time to put one in place and work to refine this on an ongoing basis,” says Theunissen.
He explains that a business model defines the way an SME operates, which makes it very different to a business plan. “A business plan is an operational document that’s usually in place for a three to five-year period. It outlines plans to grow one’s SME and make it sustainable, documenting everything from how to drive sales to when to introduce new products.”
A business model on the other hand, defines how the business will make money. “It functions as the engine-room of the business plan, showing the entrepreneur how their business will actually operate.”
In developing one’s own business model, it’s helpful to be guided by a series of questions:
1. What is the flow of transactions within my business?
2. Who are the key players involved in making these transactions?
3. What is my value proposition to the market? (What makes my business unique?)
In terms of the first question, you need to define all of the money outflows (costs, including salaries, rent, electricity, transport and everything else you need to deliver your services) and inflows (money received for services rendered, start-up capital etc.) into your business.
“List these in a very basic way initially, and then flesh out your answers as comprehensively as possible,” says Theunissen. “This will ensure you get a very clear idea of where money is coming from – and going to – in your business.”
By defining this basic flow, you will already have begun to answer the next question: who are the key players involved in making these transactions?
“While these will typically comprise your workforce and clients, drill down further to understand which clients are acting as conduits to new markets, as well as how you source new business. This will provide you with an even clearer picture of your flow of capital and help you identify the key partnerships that are essential for your business,” Theunissen explains.
Once you can see where you’re making your money, you’re then in a position to answer the final question and consider your revenue in line with your value proposition (what separates you from your competitors in the market).
“Be sure to separate your core business (e.g. guarding and armed response) from any additional services that could be linked to the core business you provide (e.g. installing security systems for customers). Once you’ve done this, focus on what sets you apart from your competitors in both respects and consider how you can use and market your value proposition even more effectively.”
As soon as your business model has been developed, take it to market and test it with the key partners you’ve identified: “This will help you to make necessary tweaks where required.”
Throughout development and implementation, Theunissen urges entrepreneurs to remember that this is a process. “Start with a simple business model that covers the basics outlined above – and then build from there. This will ensure that your planned growth trajectory is viable and sustainable, and lays the foundation for future growth and success,” he concludes.