Credit Matters Blog

Business Model Concepts Verses Real Business Success

Kim Radok 13 October 2016


Last month I discussed the concept of how business models can lead to unforeseen problems when management is unwilling to quickly adapt their business to meet changing circumstances. In this blog, the discussion is focused on different models of business verses the reality of running a successful business

The only real long-term success for any business is its ability to earn a profit and receive sufficient cashflow from the sale of its core products and services. If the business is also able to generate cash or profits generated from peripheral sources, this is a bonus. Whilst earning additional cashflow and profits from peripheral sources is valuable, the cashflow and profits from these sources is usually not sustainable over the long-term.

That many new businesses will not be profitable in the short-term, is not unusual. There must be enough capital however to sustain the new business in this start up period. In time, the business needs to stand alone as a profitable venture. Problems start for new businesses when sales and cash are not sustainable and the proprietors resort to creative accounting to keep the business operating.

Perhaps you will remember the first Dot.Com era when management use to proudly proclaimed they were not seeking a profit "at the moment". On other occasions you heard their lament; they were close to or were making a profit and felt they had missed something or were not expanding quickly enough! Not surprisingly, many of those new businesses did not live long past their start-up phase.

There are three basic philosophies behind many business models.

The first are based are based on criminal behaviour, such as the Ponzi schemes, frauds, marketing scams and so on. Too many people forget, criminals have their own business models, which are discounted as genuine business models because of the criminality factor.

Secondly, there is the business model built with genuine intent to succeed; where the business owners and managers have no intention to disadvantage any other stakeholder.

The intent behind these businesses is to survive and prosper over the long-term, by utilising exchange rate profits, supplier rebates, government grants etc. History shows these are valid and valuable short-term strategies which can add extra value or profits from time to time. Without a core and profitable reason for being in the business in the first place however, these strategies do not generally hold up over the long-term.

Third, are the business owners and managers who believe it is "smart" to slow pay their creditors and /or finding excuses to delay payments via bogus claims, under pay their employees, ignore Government regulations and generally to take short-cuts etc.

Again however, soon many of these "smart" business people find their strategies are not always conducive to long-term survival.

If your business is able to generate peripheral sources of income, you are indeed fortunate. At the end of the day however, a business model is only as good as long as the cashflow and profits keep coming. When the cash stops, so does the business. The main hope any business has over the long-term, is to have a core reason for being in business, without the need of peripheral income from other sources.