Why is a business model important for a business?

small business model

You’ve come up with a great small business idea and are ready to start a small business. You’re ready.

But, are you really?

Before you start your small business, you must create a business model.

A business model is a blueprint for small business success

Building a business is a lot like building a house. And who can build a house without blueprints? Creating a small business model means planning your business’ fundamentals. It helps you put make a realistic evaluation of the potential success of your business idea. A business model helps you to figure out things like:

  • Your business concept – what problem are you solving for whom
  • How you will create customer value
  • How your product or service will get to customers
  • How your business will stay competitive
  • All revenue and costs you can anticipate

How to create a business model

A proper business model takes time. You need the strongest foundation possible to increase your odds of small business success. Consider all possible areas of concern. There are many variables involved in entrepreneurship. For example, how exactly will your product make its way to your customers? What is the true value of the solution that your product or service offers? Is there even a market for what you’re offering?

Make sure your business model is thorough and covers all the bases. Once you have a business model that proves you have a viable business on your hands, you’re ready to write a more comprehensive business plan.

Taking your time creating your business model will ensure you don’t underestimate – or overestimate – anything. Proper planning takes time and effort, but you’ll see the return on that investment when your great business idea has become the great, successful small business you envisioned.

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The difference between a business model and a business plan

When you’re getting ready to start your small business, you want to create as solid a foundation as you can – and that involves education and planning. You might have heard that you should start with a business plan, or a business model. That’s great! But what are they, exactly, and how are they different from one another?

Business model

The business model is a blueprint for the business, outlining how you’re going to run your business, and how you’re going to make money.

There are five elements of a business model:

  • Business concept: A short description of an opportunity, including a description of your average customer; the benefit of your product or service to the customer; the product or service; and the way you’re going to get your product or service to the customer.
  • Value chain position: Your business’ position on the chain of activities through which products and services pass to get from you all the way to the end user.
  • Calculating customer value: An estimate of the value of the tangible benefits your customers will receive by purchasing your product or service.
  • Revenue sources and cost drivers: Identifying your sources of revenue, and activities that come at a cost.
  • Competitive advantage: The state when customers perceive your products or services to be superior to your competition.

Business plan

Where a business model is a blueprint, a business plan is a roadmap. A business plan is a formal written document that includes a description of the business you want to run, your business goals, and the plan for reaching those goals.

A business plan is a detailed document that contains sections such as: Marketing Plan, Startup Expenses and Capitalization, Management and Organization, Products and Services, and Operational Plan.

A business plan is usually developed around the answers to three common questions:

  • Where are we now?
  • Where do we want to be?
  • How are we going to get there?

And is usually written for one or more of these five reasons:

  • To test the feasibility of your business idea and work out any bugs on paper first.
  • To develop strategies ahead of time for marketing, finance, operation and human resources, instead of when you’re in the fast-paced start-up stage.
  • To get funding, such as a bank loan.
  • To attract investors.
  • To have a roadmap to follow for at least the first year in business.

Why does your small business need both a business model and a business plan?

It’s easy to come up with business ideas, but just because you build a company, that doesn’t mean customers will come. A great deal of time and effort should be spent planning before your new company’s products and services ever reach the market. You need a good foundation and planning before you invest all your time and money.

To get started, check out our free One-Page Business Plan – happy planning!

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From the archives: Why a business model is so important

It’s a new year, and maybe this is the year you take the exciting step of becoming an entrepreneur.

What better time than the beginning of the year to make that preliminary sketch of your thrilling new small business? You’ve probably got a lot of ideas kicking around in your head, so now’s the time to see which of them will help your new venture, and which might not.

That’s where the business model comes in. Your business model is the blueprint for small business success. It helps you figure out all the various aspects of your small business – from your costs to your distribution model to the value you’re providing for your customers. Running a successful small business is about more than marketing or sales or any one aspect – it’s all of them!

The business model is the foundation of your small business

No matter what you do in your small business, we strongly recommend you start with a business model. It can save you money and lots of wasted time and effort.

So what goes into a business model? We’re glad you asked! Check out one of our most popular blog posts: Why a business model is so important. A business model will help get your business on the track to success – don’t leave home without it!

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Why is it important to write a business plan?

We’ve talked before about the elements of a business plan. But what are the benefits of writing one?

A business plan is the design and construction plan for a great small business. If you wanted to build a house, you wouldn’t walk over to an empty lot and just start nailing boards together. You’d follow a blueprint that tells everyone what the finished product should look like and how to build the home. Essentially, a business plan serves the same purpose.

There are five really good reasons to write a business plan before you start a business:

  1. To test the feasibility of your business idea and work out any bugs on paper first.
  2. To develop strategies ahead of time for marketing, finance, operation and human resources, instead of when you’re in the fast-paced start-up stage.
  3. To get funding like a bank loan.
  4. To attract investors.
  5. To have a roadmap to follow for at least the first year in business.

For more about business plans, read about what a business plan contains, and what the secret is for writing one.

 

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What does a business plan contain?

We’ve talked before about business plans, and why they’re so important for a successful small business. But what exactly does a business plan contain?

Even though each business plan might be a little different, the overall structure will include some core elements that stay the same, regardless of the type of business you might start. Only the length and focus of the business plan might change, depending on the audience.

The standard business plan format

  • Cover page and table of contents.
  • Executive summary: A one to two page description of the whole business plan.
  • Description of the current situation: Basic company information like what the business is about, what products and services you’ll offer, your management team, type of business organization (sole proprietorship, partnership, corporation or co-operative), and what your goals are for the future of this business.
  • Description of opportunity and market: Who are the buyers, who are the competitors, what are the competitive advantages? A market consists of a group of current and/or potential customers with the willingness and ability to buy goods or services to satisfy a particular class of wants or needs. You should explain how many customers will buy, what they buy now and how much they buy.
  • Description of the marketing and sales strategy: Explain your marketing strategy, which is usually a combination of four strategies: product, price, place, and promotion.
  • Basic facts on the financials: Cash flow projections, income statement, balance sheet, and funding requirements.
  • Risk analysis and possible exit strategies: Because of the many assumptions about an unknown future, most people will agree that there’s tremendous risk in any entrepreneurial venture. A serious business plan needs to account for this. It needs to include statements on the risks associated with the business, and on the actions the entrepreneur plans to take if issues occur.
  • Conclusion and appendices: Résumés, other sources of information, and any technical descriptions necessary for the reader to better understand your business plan.

Some basic business plan rules to follow

The content of a business plan is important and there’s a lot of information to include. It’s also important to keep the length of a business to between 10 and 40 pages. Brief, focused, and concise. Also, follow basic rules of grammar, punctuation and style. Information should be clearly organized, and logically presented. Make the executive summary as strong and compelling as you can, because most people will quickly judge the venture on that portion of the plan.

Why a business plan is important

The real value of creating a business plan isn’t having the finished product in hand. The value lies in the process of researching and thinking about your business systematically. The act of planning helps you to think things through thoroughly, study and research if you aren’t sure of the facts, and look at your ideas critically. It takes time now, but can help you avoid costly, maybe even disastrous, mistakes later.

It’s a lot of work, but it’s one of the most important things you can do in a small business. It helps you work out the kinks and reorganize things early on, before you’ve spent all your money and time setting up shop.

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