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BMGen and financials
Analysing the profits of SME companies, I found out that the ratio between value added and personnel costs is dominant when determining the profitibility of companies (see graphic below).
In other words, a business model that allows personnel to maximise the value added they create, will be most attractive in financial terms.
However obvious this hypothesis may sound, I hardly hear any sensible things about this (too much ado about IFRS, US-GAAP, fair value, impairment and the such).
Main focus on balance sheet, hardly on P&L.
How do you BMGenerators include profitability in your designs?
Tags: accounting, added, bmgen, profit, value
Replies to This Discussion
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Permalink Reply by Alex Osterwalder on -
Hi Paul. The Business Model Canvas has nine building blocks, of which two are "Revenue Streams" and "Cost Structure". Profitability is simply an outcome of those two, which reflect all the other business model building blocks. Part of the power of the Canvas is to keep it simple...
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Permalink Reply by Paul Mencke on -
Thanks Alex. I have to be more specific to make my point. What I see is that profitability is more than only the outcome of costs and revenue. Finance (in the sens of P&L) follows certain patterns.
One of them is that the value added is a more important and relevant item than turn-over. Depending on the design and execution of the business model, the company will be able to gain richer (more value added) turn-over. Again obvious, but nevertheless meaningfull.
Another one is that value added should be at least 170% of the costs of personnel (as key asset), to be able to play break even.
Also there is a high degree of predictability (r=0,8) from (labour) productivity towards profitability. When the business model allows personnel to realize a value added of 250% of their own costs, the profit will tend towards 40% of value added.
These patterns help to identify and realise the full potential of succesful business models.
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Permalink Reply by Johnni Nielsen on -
Actually I would work on cash-flow (CF) level rather than P/L as it is cash return on investment we are interested in. In most businesses the management of cash liquidity is vital, and especially so in new start-ups. One could break each VP into in and out-going CFs, and hence create transparency in terms of liquidity needed for each. Depending on how cash constraint one is, a road of implementation could more prudent be mapped.
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Permalink Reply by Mario van der Leest on -
hi,
I think this has all to do withe the way how you translate the results of the building blocks "revenue streams" and "cost structure" to your internal financial model. The building blocks can deliver the input for a further internal financial transalation.
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