What Every New Business Needs for a Scalable Business Model

Growing Your New Business

What is the first step to starting your own business? Many entrepreneurs will go through a lot of business ideas and business models for executing those ideas before actually starting their business.

An idea is the seed that begins with business. But without water, nutrients and sunlight, no seed can grow.

A seed needs water to open up and begin to grow, as a business needs capital to get started.

A company needs sunlight, like positive customer feedback and product-market fit to get bigger and stronger.

And a company needs nutrients, small minerals of advice and pushes in the right direction to build a strong foundation for future growth, a long life, and bearing fruit.

Nutrients can come from all kinds of advice. Advice on how to understand your customers better, advice on how best to spend early capital, advice on how to build a strong and scalable business model.

Since the last one is the one that I know the most about, I am going to tell you how, before you even launch your business, you can determine if you have a viable business model.

Creating a Viable Business Model

Recently, a friend founded and launched a small business. The business provided a new twist on workout services and they built an incredible, beautiful space. They got great feedback from potential customers and commitment help to build an incredible space from their landlord.

They even built a quick financial model before they started (something I’m a big proponent of!). But once they built out the space, the economics turned out to not be what they expected.

Sign-ups for classes were lower than anticipated, and their business model where they paid salaries rather than commissions for teachers, turned out to be too expensive upfront.

Many small businesses take some time to ramp up, but by the time this business had opened its doors they had practically already run out of cash. Lots of unforeseen startup expenses meant they were 10% over budget. The marketing was incredible and customer feedback was strong, but sign-up still lagged.

Why Businesses Should Have a Scalable Business Model

So what did they do wrong?

This is a very common problem for startups. There are always unforeseen expenses, so whatever you think is going to cost to build your business, add 10 to 20% of unknown. Then give your business some time to reach its potential. Make sure you build in cash flow for several months where you won’t be at full capacity. Remember, your seed needs time to grow!

The situation in this business is they expected to open and fill their classes within a month or two. Because it ended up taking three or four months, they didn’t have the cash to cover the rent.

Thankfully, they were able to pivot and rent some of their fabulous space to other businesses who could utilize it. They were also able to use those additional businesses to pay a portion of their staff’s wages.

This wasn’t the business model they embarked on, but it became necessary as they realized their business model wasn’t necessarily “not working” but it wasn’t working quickly enough.

In fact, the most common reason for businesses going out of business is running out of cash. Not having enough cash to do one more pivot to get through a bad month or two. Sometimes given another month or two of cash flow, a business will make it. Not always, but it’s worth giving your business a fighting chance.

So if you’re building a plan to start a business, build in some buffer for expenses, then add 10% and a couple of extra months to hit the revenue you need.

Need help thinking about financial buffers? Consult with a CFO today!