Picture this. You have decided that by building an application, you can solve people’s money problems, possibly by helping them draw a budget and keep to it daily. You should not have any problem with market entry because this is a need. Right? Or let’s say you have created a verification app where people can verify news and information they see on the internet. Very impressive, yeah! You don’t even need to convince anyone to adopt your product.
The million-dollar question is this; how do you intend to make money off this fantastic idea?
Will this model be convincing to get an investor to part away with his or her money? How does this translate into profit for you? Even if it does raise some money, will it be sufficient to keep the business operations going? Or is this going to be some sort of charity venture or not-for-profit business? These are some of the questions you get to answer when defining your financial model.
These questions should be answered before you decide to do business with it. It is okay to solve a problem, but if it does not translate into cash, you might as well be running a not-for-profit organization.
The term financial model simply refers to your plan for making a profit. Your business model identifies the products or service, the market, what you hope to have customers pay for it, what percentage of it will go into operations and expenses and what percentage becomes profit. This is not only for new businesses but also for old companies planning new product launches.
You should factor in startup costs, your financing sources, marketing strategy, sustainability plan, and possible partnerships. Your business could adopt a B2C (Business to consumer) model, a B2B (Business to business) model, a C2B (Consumer to Business) model, or a C2C (Consumer to consumer), but the party receiving the service or product should be willing to pay for it.
Another thing your financial model (which is part of the business plan by the way) should do is anticipate trends, and that is why it is an ongoing process even for existing businesses. Today’s world is a lot more dynamic than we could ever have imagined, and your plans for making a profit could easily become outdated as soon as another business launches with a better option. Factor all of that in a while drafting and updating your business model and your financial model.
Can you imagine what it would be like if the service you are offering for a fee becomes the same service another Company offers pro-bono or as a value-added service for customers who subscribe to their products? You could be out of business in the twinkle of an eye.
Also, try to envisage challenges that could come up for your business in terms of government policies, cultural challenges, and the like. Trust me, an investor is more likely to take you more seriously if you have factored in all the possible challenges and addressed them in advance, than if you have merely glossed over them in the hope that they never show up.
