Every business owner has, or at least has heard of, a business plan. It summarizes the operational and financial objectives of your business and gives a high-level overview of the operations of your company. Business plans are not only useful for planning purposes, but are oftentimes necessary to obtain financing and attract investors.
But what about a business model? This distant cousin of the business plan is rarely written or talked about, but it’s what separates a Starbucks from an ordinary coffee shop. It describes your business and how it will generate revenues. It assesses the marketplace’s needs, risks and costs and is the basic framework your company will follow to become profitable.
Smart Business learned more from Matt Marchbanks and Paul Orsborn of Comerica Bank about the main components that your business model should contain.
What is the first thing a business model should contain?
Marchbanks: The first item to include is a description of the products and services your business will offer and why customers should purchase them. What makes your business unique and differentiates your products or service offerings? How will they fulfill the needs of customers? You must consider in your business model how you will transform your product or service into something attractive to consumers and how it will be made available to them. In essence, you should describe what will make your business successful.
Should necessary expenses be included in a business model?
Orsborn: Yes, the next crucial item to consider is how much your fixed expenditures will be. First, think about the core operating costs of the business. This includes everything from rent and employees to equipment and office supplies like computers. Also take into consideration the cost of any fees you may encounter when starting your business, like licenses, agreements and legal, accounting and insurance fees. You should also determine how much your product will cost to produce. Will you need a factory or supplier to produce it? Will you need to pay for shipping or transportation across the country? If you’re going to offer a service, think about what upstart costs you will incur.
How should revenues be factored in?
Marchbanks: The next step is determining how you will make money to offset the cost of your expenses and, in the end, be profitable. Who will your potential customers be? Look at the demographic you will be targeting and identify your target customer. Next, start to think about how you will develop customer relationships and how you will sell your product or service. You will need to develop a marketing and distribution strategy. Entrepreneurs should learn about trends and new breakthroughs and research their competitors. It’s also a good idea to talk to people outside of your industry. You never know what valuable information you can gain from an outside perspective.
Should a detailed financial plan be developed?
Orsborn: Yes, your detailed financial plan should include the initial investment needed to get your business up and running, like facilities and equipment, and also working capital to begin and sustain operations. It should also include an itemized list of expenses and revenue projections and keep track of profit, return on investment and cash flow. Also remember to keep continually thinking about your business model after you start your business, especially when it’s time to branch out. If your business goals change, it’s time to revise your business model.
Matt Marchbanks and Paul Orsborn are senior vice presidents for Comerica’s Texas Business Banking Division. Comerica Bank is the commercial banking subsidiary of Comerica Incorporated (NYSE: CMA), the largest U.S. banking company headquartered in Texas, and strategically aligned by three business segments: The Business Bank, The Retail Bank, and Wealth & Institutional Management. Comerica focuses on relationships, and helping people and businesses be successful. In addition to Dallas, Houston and Austin, Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating in several other states, as well as in Canada and Mexico. Comerica reported total assets of $53.7 billion at Dec. 31, 2010. To receive e-mail alerts of breaking Comerica news, go to www.comerica.com/newsalerts.
