7. Do you need a business model?

I would recommend it. A business model is a plan that describes how your business makes money.

Revenue (or sales income)

Once you have decided what your business is going to do, you need to try to work out how many potential customers will be attracted by your product or service (i.e. the size of the market you aim to sell to), the percentage of these you estimate will become your customers and the price they are prepared to pay. Multiplying the estimated number of buyers by the price will give you an idea of your revenue over a period of time. It is a good idea to estimate your annual revenue for the next three years, as it will take time for your business to establish itself. Your business plan will go further - estimating your annual revenue by month as well.

Cost of Sales

Cost of Sales, also called cost of goods sold depending on if it is a product or service, describes the total costs directly attributed to manufacturing the product or delivering the service sold by your company. These costs can include labour, materials and shipping.

Gross profit margin

Gross profit is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. It is important to understand this figure, along with your gross profit margin, which is:

Gross Profit Margin (%) = (Revenue-Cost of Sales) / Revenue x 100. For example, if your revenue is £10,000 and your Cost of Sales is £5,000, then your gross profit margin is £5,000 / £10,000 x 100 = 50%.

According to Investopedia, ‘A startup with a healthy gross margin generates enough revenue to cover the costs of production, as well as fixed costs such as administrative expenses, rent and utilities, interest payments on debt, payroll, taxes, insurance and advertising costs. This makes it much more likely that the business will succeed…Successful businesses have developed business models that enable them to fulfill client needs at a competitive price and sustainable cost.’ Over time, circumstances change, and many businesses revise their business models frequently to reflect changing business environments and market demands. Read Investopedia’s articles on How Gross Margin can Make or Break Your Startup and Business Model.

Business modelling is a complex subject and lots has been written about the Business Model Canvas, a strategic tool for constructing your model. On the other hand, if you can just work through how your business is going to make money and prove to yourself that you can make a profit, then that is an excellent start.