A business model is a holistic framework to describe, understand, and analyze how companies provide and capture value. The financial model is how companies generate profits, cash, and are financially sustainable. A financial model is indeed part of the overall sustainable business model and one of its core components.
Aspect
Business Model
Financial Model
Definition
A Business Model outlines how a company creates, delivers, and captures value. It describes the core aspects of a business, such as its value proposition, target customers, and revenue streams.
A Financial Model is a quantitative representation of a company’s financial performance, often used for forecasting and decision-making. It includes projections of income, expenses, and cash flow.
Purpose
– Defines the fundamental logic of how a company operates. – Helps identify revenue sources and cost structures. – Guides strategic planning.
– Aids in financial planning and budgeting. – Supports investment decisions by providing insights into a company’s financial future. – Used for valuation and risk assessment.
Components
– Value Proposition: What the company offers to customers. – Customer Segments: Target groups of customers. – Channels: How products or services are delivered. – Revenue Streams: How the company earns money. – Cost Structure: Expenses incurred in delivering value.
– Revenue Projections: Estimations of income from sales and other sources. – Expense Projections: Forecasts of operating costs, including fixed and variable expenses. – Cash Flow Projections: Predictions of cash inflow and outflow.
Strategic Focus
– Emphasizes how a company creates and delivers value. – Helps identify competitive advantages and market positioning. – Explores innovation and adaptation.
– Focuses on financial performance and sustainability. – Assesses profitability, liquidity, and solvency. – Provides insights into investment returns and risk management.
Application
– Used to develop and refine a business concept. – Guides startups in finding a viable path to profitability. – Helps established businesses adapt to changing market conditions.
– Applied in financial planning, including budgeting and forecasting. – Utilized for investment analysis and due diligence. – Supports decision-making related to financing and capital allocation.
Key Metrics
– Customer Acquisition Cost (CAC): The cost of acquiring a new customer. – Customer Lifetime Value (CLV): The expected revenue a customer generates over their lifetime. – Gross Margin: The difference between revenue and cost of goods sold. – Burn Rate: The rate at which a company spends its capital.
– Revenue Growth Rate: The percentage increase in revenue over a specified period. – Net Profit Margin: The percentage of revenue that represents profit. – Cash Flow: The net amount of cash moving in and out of the company. – Return on Investment (ROI): The return generated from an investment.
Risk Assessment
– Helps identify potential risks associated with the business model. – Evaluates market-related risks and competitive pressures. – Aids in mitigating risks through strategic adjustments.
– Assesses financial risks, such as liquidity risk and solvency risk. – Evaluates the impact of economic conditions on the company’s financial health. – Supports risk management by identifying potential cash flow issues.
Decision-Making Tool
– Influences decisions related to target customers, pricing strategies, and revenue diversification. – Guides choices regarding cost management and resource allocation. – Supports innovation and adaptation.
– Informs decisions about financing options, capital investments, and budget allocations. – Aids in assessing the financial feasibility of projects or ventures. – Supports decisions related to financial goals and performance targets.
Flexibility and Adaptation
– Encourages flexibility and adaptation in response to changing market conditions. – Allows for testing and refining different value propositions and revenue models.
– Provides the flexibility to adjust financial assumptions based on changing circumstances. – Supports scenario analysis to plan for different financial outcomes. – Allows for sensitivity analysis to understand the impact of variables on financial results.
Example
Consider a tech startup offering a subscription-based fitness app. The business model includes identifying target customers (fitness enthusiasts), providing value (access to workout plans and tracking tools), and earning revenue through monthly subscriptions.
Imagine a manufacturing company creating a financial model to project its future financial performance. This includes forecasting revenues from product sales, estimating operating expenses, and predicting cash flow to ensure the company can meet its financial obligations.
A business model is a framework for finding a systematic way to unlock long-term value for an organization while delivering value to customers and capturing value through monetization strategies. A business model is a holistic framework to understand, design, and test your business assumptions in the marketplace.A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketingorganizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
In corporate finance, the financial structure is how corporations finance their assets (usually either through debt or equity). For the sake of reverse engineering businesses, we want to look at three critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash flow generation.
Table of Contents
Key Similarities between Business Model and Financial Model:
Part of Business Strategy: Both the business model and the financial model are essential components of a company’s overall business strategy. They play a crucial role in determining how the company operates, generates revenue, manages costs, and sustains its financial health.
Long-Term Perspective: Both models are designed with a long-term perspective in mind. They are not just focused on short-term gains but aim to create sustainable value and financial viability for the organization over time.
Interconnectedness: The financial model is a subset of the business model and is closely interconnected with other elements of the business model. The financial model supports and aligns with the overall business strategy and value proposition.
Key Differences between Business Model and Financial Model:
Scope and Purpose: The business model is a comprehensive framework that outlines how the company creates, delivers, and captures value in the market. It encompasses various aspects such as value propositions, customer segments, channels, and revenue streams. On the other hand, the financial model is specifically focused on the financial aspects of the business, including revenue forecasting, cost analysis, profitability projections, and cash flow management.
Level of Detail: The business model provides a high-level overview of the company’s value proposition and the way it operates, while the financial model delves into detailed financial projections and analysis based on the assumptions made in the business model.
Audience and Usage: The business model is often used for strategic planning, market analysis, and communication with stakeholders, including investors, partners, and customers. It helps to showcase the company’s unique selling points and value creation potential. On the other hand, the financial model is primarily used for internal financial planning, budgeting, and decision-making. It helps management assess the financial feasibility of the business model and make data-driven financial decisions.
Components and Elements: The business model consists of various components, such as the value proposition, customer segments, key activities, resources, and partnerships. It outlines the overall value chain of the business. The financial model, on the other hand, focuses on specific financial elements, such as revenue projections, cost breakdown, profit margins, and cash flow forecasts.
Business Model Examples:
Direct Sales Model: Apple sells its products directly to consumers via its Apple Stores and online store.
Freemium Model: Spotify offers a free version of its music streaming service with ads, and a premium version without ads and with added features for a subscription fee.
Subscription Model: Netflix charges customers a monthly fee to access its library of movies and TV shows.
Affiliate Marketing Model: A blogger promotes products and earns a commission for every sale made through their referral link.
Marketplace Model: eBay connects sellers with buyers and takes a commission from each sale.
Franchise Model: McDonald’s allows entrepreneurs to operate their own McDonald’s restaurants using the brand, processes, and resources of the parent company for a fee.
Advertising Model: Google offers its search engine services for free and earns revenue through targeted advertising.
Crowdsourcing Model: Wikipedia relies on volunteers to create and edit content, allowing it to offer a vast encyclopedia for free.
Razor and Blades Model: Gillette sells razors at a low cost or even a loss, but replacement blades (which customers need to buy regularly) have high margins.
Peer-to-Peer Model: Airbnb allows homeowners to rent out their properties to travelers.
Financial Model Examples:
Cost-plus Pricing: A company determines the cost of producing a product and adds a markup percentage for profit. For instance, if a shirt costs $10 to produce, and they want a 20% profit, they’ll sell it for $12.
Discounted Cash Flow (DCF) Model: Used to estimate the value of an investment based on its future cash flows.
Comparative Company Analysis (CCA): This model involves comparing a company’s valuation metrics to other firms within the same industry to determine its relative value.
Budget Model: Companies forecast their income and expenses for the upcoming year to set budgets.
Break-even Analysis: Determines the point at which total costs and total revenue are equal, meaning there’s no net loss or gain.
Projected Income Statement: Forecasts a company’s revenues, costs, and profits for a future period.
Balance Sheet Projection: Predicts a company’s assets, liabilities, and equity for a future date.
Capital Asset Pricing Model (CAPM): Used to determine a theoretically appropriate required rate of return of an asset.
Merger and Acquisition Model: Used by companies to evaluate the financial impact of merging with or acquiring another company.
Option Pricing Model: Used in finance to calculate the fair value of an option based on factors such as stock price, exercise price, time to expiration, and volatility.
Key Highlights:
Business Model:
A holistic framework used to describe, understand, and analyze how companies provide and capture value.
Focuses on finding a systematic way to unlock long-term value for an organization.
Delivers value to customers and captures value through monetization strategies.
The ADKAR model is a management tool designed to assist employees and businesses in transitioning through organizational change. To maximize the chances of employees embracing change, the ADKAR model was developed by author and engineer Jeff Hiatt in 2003. The model seeks to guide people through the change process and importantly, ensure that people do not revert to habitual ways of operating after some time has passed.
You can use the Ansoff Matrix as a strategic framework to understand what growthstrategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growthstrategy can be derived from whether the market is new or existing, and whether the product is new or existing.
The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.
The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.
The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is valueinnovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.
First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is valueinnovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.
The GE McKinsey Matrix was developed in the 1970s after General Electric asked its consultant McKinsey to develop a portfolio management model. This matrix is a strategy tool that provides guidance on how a corporation should prioritize its investments among its business units, leading to three possible scenarios: invest, protect, harvest, and divest.
The McKinsey 7-S Model was developed in the late 1970s by Robert Waterman and Thomas Peters, who were consultants at McKinsey & Company. Waterman and Peters created seven key internal elements that inform a business of how well positioned it is to achieve its goals, based on three hard elements and four soft elements.
McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.
The McKinsey Horizon Model helps a business focus on innovation and growth. The model is a strategy framework divided into three broad categories, otherwise known as horizons. Thus, the framework is sometimes referred to as McKinsey’s Three Horizons of Growth.
Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces.
According to Michael Porter, a competitive advantage, in a given industry could be pursued in two key ways: low cost (cost leadership), or differentiation. A third generic strategy is focus. According to Porter a failure to do so would end up stuck in the middle scenario, where the company will not retain a long-term competitive advantage.
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.
Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, related and supporting industries.
A SWOT Analysis is a framework used for evaluating the business‘s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.
The STEEPLE analysis is a variation of the STEEP analysis. Where the step analysis comprises socio-cultural, technological, economic, environmental/ecological, and political factors as the base of the analysis. The STEEPLE analysis adds other two factors such as Legal and Ethical.
A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
