Build a financial Model

But the baker realizes that the running costs are high.

It's difficult to keep a unprofitable activity.

Every project starts with a financial Model which includes, on the one hand the investment and running costs and, on the other hand the revenues. It enables us to calculate the return on investment and to test several scenarios.

The Business Plan indicators will guide the baker to success.

  1. What is a financial Model?

    A financial Model lets us simulate the financial situation of the Enterprise according to investment, operating and growth assumptions.

    As an example, a financial Model to decide on a new Product or Solution of Foundation project is similar to the one shown in the diagram below.

    Financial Model for Transformation

    At any given time, the Enterprise Operates with a Model V1: it respects its Product Model; it Operates by respecting the Operation Model, that is to say the Solution Models which are themselves built by respecting the Foundation Model.
    Its Operational costs have to be deducted from its Operational revenues to deduce its Profit.

    But, if the Enterprise is considering Operating with a Model V2, for example to increase its productivity (new Solution) or to launch a new Product range, we will have to Build then Deploy this Model, which requires a Project whose investment cost has to be compensated for by the increase in future Operational profits.
    The number of years during which the new Model will be active depends on the time period between both versions of the Model.

    To reach a good level of precision, we have to know how to evaluate the time required, and therefore the cost, of a Transformation, which is the first challenge as we systematically underestimate the time needed to Transform. We also have to be able to evaluate the differences in cost and Operating revenues between both versions, which is the second challenge. Finally, we have to determine the lifespan of the new Model to know over how many years it will be amortized.

  2. How do we evaluate the intangible Capital?

    But the result of a Transformation Project also changes the Capital of the Enterprise. When we think of "Capital", we tend to think of "Goods": premises, equipment and stocks of intermediary Goods are part of that.

    But the Enterprise also possesses an intangible Capital that can evolve with the help of a Project:
    • The Transformation Model and its consequence, Agility, can also evolve
    • The Foundation is enriched: it participates in the overall consistency of the Enterprise.
    • The Image of the Enterprise can be changed
    • The Enterprise Culture may also be transformed

    We manage today to value the image through the brand: evaluations and rankings are made every year to associate an amount to a brand.

    It is extremely difficult to value the Enterprise Culture and its Transformation Model. Yet, everyone understands that the Value of an Enterprise is also linked to its capability of evolving quickly: but how do we quantify it? Financiers include this evaluation in what they call "goodwill", but the evaluation methods are still really empirical.

    1. Do not forget the Foundation

      As we mentioned earlier, a Foundation represents everything that can be reused to contribute to the common good in the Enterprise, especially the Enterprise Architecture and all the reusable Model Components that can be used to assemble new Solution Models or new Product Models.
      When we invest in a Foundation, we increase costs without any immediate results. Profits will come when Building new Models that use the Foundation.
      The profitability of a Foundation can only be reached at the second level: not only must the Foundation be well built, but it must also be used by the new Solution Models or by the new Product Models. It is therefore a very difficult investment to bring about; and yet, those who have managed have profited from a sustainable competitive advantage.

      We can mention the examples of German automobile manufacturers who have a high rate of reuse of their components to assemble their new Models.
      We can also cite technology companies like Amazon, Apple or SalesForce who reuse, to a large extent, the software components to build new Solutions for themselves, and who have now made these components available in the form of a new Offer for other software vendors.

      The economic Model must therefore include the intangible capital that the Foundation represents. Building new Product Models or new Solution Models more quickly has a Value: agility is part of the capital of an Enterprise.
      But how do we evaluate the Agility Value? How do we prove that the investment is worth the candle? Once again, we come up against the limits of a financial approach.
      The same reasoning can be held for the other intangible elements, Culture or Image, which require investments whose profitability is hard to prove.

      One method consists in following a checklist of criteria to identify where we bring Value:
      • Criteria linked to the Transformation
        • More Agility?
        • Better "time to market"?
        • More robust Solutions?
      • Criteria linked to the Operations
        • Enable more rapid Growth?
        • Improve the customer Relationship?
        • Generate international Products?
        • Help Synergy between different entities of a group?
        • Better control of risks?
        • Provides better management information?
        • Improves quality of service?
      • Criteria on the Resources
        • Facilitate human resources management?
        • Reduce Operational costs?
        • Reduce Transformation costs?
        • Facilitate Mergers?
        • Enable better control of the IT Operations?
  3. Financing by advertising

    In 2013, YouTube captures 20.5% of the video advertising market on the Internet, as do Google or Facebook (see the emarketer study in French).

    An increasing share of advertising budgets are now given over to finance Internet-accessible Solutions. The revenue no longer comes from Distributing the Offer (that we have to pay for), but from the online advertising that must be taken into account in the financial Model.

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The story of George the Baker is made available under the terms of the
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