Your Revenue Model Won't Survive Without These 3 Things
Creating a revenue model is usually the first and most prominent concern that an entrepreneur has when building out a new business. Once a business’ first group of products have been sold at a significant volume, it’s a huge relief and provides validation that the business is working.
However, after this initial accomplishment, I’ve found that there are three more components that the entrepreneur needs to nail down in order to create a sustainable revenue model for their business.
Validating that a product can be sold brings a startup to life, but a sustainable revenue model strategy keeps the business breathing.
1. Consistency Equation
After you’ve learned how to generate revenue for your business, you now have to figure out how to generate revenue consistently. Consistent revenue is the foundation for a business that can pay its employees, rely on steady cash flow, and plan for its future. Consistent revenue is what helps a business place roots and stabilize itself for the future.
Figuring out the exact inputs needed to produce a consistent revenue equation is a journey that takes time, refinement, and close analysis.
Some questions to consider when working on creating consistent revenue is:
What marketing and promotional strategies worked when selling our products in the past?
How reliable are these channels in producing consistent, recurring sales?
How much money, labor, time do we need every month to create recurring sales?
Once you’ve figured out your equation for consistent revenue, you should be able to apply it to your business on a monthly basis and have it produce monthly (or whatever schedule you’ve selected) revenue, consistently. This, of course, is a challenge in it of itself that takes experimentation, time, and resources.
2. Cash Flow Schedule
A business’ cash flow will be different for every industry and business. For example, a toy company may see spikes in their purchases during the holiday season and generate 80% of their year’s revenue during that time, while a sandwich shop may see consistent revenue on a month-to-month basis.
To determine what this schedule looks like for your business, you should be analyzing your numbers on a daily, weekly, and monthly basis while asking yourself these questions:
Is my revenue mostly coming in one quarter/month/season of the year?
Is my revenue pretty consistent month-to-month? Or does consistency lie within quarters/seasons?
Are there specific days of the week when the business is doing best?
Once you see some patterns and trends, you can extract that schedule and begin to anticipate your business’ cash flow, plan large purchases, schedule out hiring schedules and vacations, and more.
Understanding your cash flow rhythm (like knowing when high cash flow months are) is also knowledge that empowers you to stay sane during low cash flow months.
3. Financial Reserve
Once you’ve figured out a Consistency Equation and a Cash Flow Schedule for your revenue model, figuring out how to save up a cash reserve, or having a reserve credit card is a great way to protect your business when your business’ cash flow doesn’t go as planned. You will be presented with plenty of internal and external circumstances throughout the lifetime of your business that will delay cash flow, add a huge dent to your expenses, and pose other unexpected road bumps.
Giving your business access to a reserve for those unexpected (or expected and undesirable) moments is an important practice to start early. Whether you build up this reserve by putting aside a certain percentage of your income into a separate account, or you sign up for a credit card that will act as your reserve, establishing a reserve option will provide financial relief during high-stress moments.
I don’t call this an emergency reserve for a reason — the number of times you’ll have to tap into your reserve usually won’t be a one-time occurrence, and it’ll probably be a resource for your business more times than you’d like. If you ask any entrepreneur who has built a business before, these road bumps are not a matter of if, but a matter of when they’ll happen (and they’ll usually happen within the first year of your business opening its doors).