Understanding Your Business Model

Your business model describes the key elements of your business and how they fit together to create, deliver and capture value. If your business model is not sustainable, is inappropriate or inadequate then your business is at risk. Understanding your business model is essential if you are to manage and grow your business.

In my work with owners of small businesses I place a lot of emphasis on understanding their business model. I find that unless the business owner also has this understanding it is difficult for them to get beyond their immediate ‘to do’ list.

A clear understanding of your business model is essential in seeking loan funds from your bank or equity capital from an investor. Because the business model shows how the business creates, delivers and captures value it is the most important piece of information they need to know. It is also an excellent tool for communicating to staff how the business works. And finally, understanding your business model is a pre-requisite for exploring ways to restructure the business or moving it to the next level.

The best business model tool I have come across is the business model canvas, which is available as a free download.

The business model canvas allows you to set out on a single page what the business does, the customers you serve, your value proposition, your revenue sources, the resources required to run the business, and your cost structure. Overall, there are nine building blocks in the canvas and together these building blocks describe the logic of how the business currently, or plans, to make money.

In my book WORKING ON YOUR BUSINESS setting out a business planning process for small businesses, I describe the contribution of the business model to developing a business plan. It is one of the key drivers that must be understood in describing where the business is now. It is also required input to deciding where the business is going and how it will get there.

Understanding your business model is essential to the future of your business. Without this understanding the challenge of managing and growing your business is made more difficult.

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