Group-6

Business Model, Forecast the Revenues of the Business, Forecast Expenses

Incurred & Compute Profits

BUSINESS MODEL

Business model is a description of how your business makes money. It is an explanation of how you deliver
value to your customers at an appropriate cost. Models generally include information like products or services the
business plans to sell, target markets, and any anticipated expenses. It acts as the blueprint of the business and a
roadmap for its success or failure as it explains how the business creates and captures value through its decisions
and processes. According to management guru Peter Drucker:

“A business model is supposed to answer who your customer is, what value you can create/add for the customer
and how you can do that at reasonable costs (Das 2020).” In their simplest forms, business models can be broken
into three parts (Parsons n.d.):

 Everything it takes to make something: design, raw materials, manufacturing, labor, and so on.
 Everything it takes to sell that thing: marketing, distribution, delivering a service, and processing the sale.
 How and what the customer pays: pricing strategy, payment methods, payment timing, and so on.

Different Kinds of Business Model (Parsons n.d.)

1. Advertising – You have to satisfy your two customer groups: your readers or viewers and your advertisers.
Examples YouTube
2. Affiliate – Uses links embedded in content instead of visual advertisements that are easily identifiable. For
example, if you run a book review website, you could embed links to Amazon within your reviews. Examples;
Top TenReviews.com
3. Brokerage – Connects buyers and sellers and helps facilitate a transaction. Example: Real Estate Agency
4. Customization/ Concierge- Take existing products/ services and add a custom element to the transaction
that makes every sale unique for the given customer. Example Nike Customized sneakers
5. Crowdsourcing – Frequently paired to Advertising models to generate revenue. Providing the right rewards
to entice the crowd is the key to successful crowdsourcing. Example: YouTube
6. Franchise – Common in the Restaurant Industry. You are selling the recipe for starting and running a
successful business to someone else. Example: Jollibee
7. Leasing – Like renting, at the end of a lease agreement, the customer needs to return the product. Example:
Condominium, Cars
8. Marketplace – Allow sellers to list items for sale and provide customers with easy tools for connecting to
sellers. Example: eBay, Shoppee
9. Subscription – Consumers get charged a subscription fee to get access to service. Example: Netflix
10. Pay-As-You-Go – Customers get charged for actual usage at the end of the billing period. Water or Electric
Companies

Develop Business Model

Business models are important for both new and established businesses. In developing business models,
entrepreneurs must adapt the dynamics of traffic lights. These are the three “green lights” or the positive signals
that can help entrepreneurs to develop ideal business models and eventually succeed. On the other hand, there
are three “red lights” or negative signals that entrepreneurs must avoid.

Green Lights

 Target high value customers – someone who is easy to find, willing to pay a price that will reasonably
profit the entrepreneur, easy to persuade with the least promotional effect, and someone who can join
 the bandwagon of customers that, when consolidated, can generate a substantial amount of revenues
aligned with the profit objectives of the entrepreneur.
 Offer products or services with great value – The value proposition and unique selling proposition should
always kick in. The entrepreneur must position the unique attributes of the product/ service. The
entrepreneur must also devise an efficient distribution system where the flow of goods/ services delivery
is convenient, fast and available when needed, and consider the influx of technological advancements
such as the internet, and third-party outsourcing.
 Offer products or services with reasonable profit – Increase markup and decrease operation cost. The
entrepreneur should devise an efficient distribution system, lessen unnecessary manpower efforts, apply
lean manufacturing processes, and add support products or auxiliary services that can increase revenue
without adding substantial cost.

Red Lights

 Satisfying the customer becomes too costly and irrational – The entrepreneur must calculate the cost
and profit associated with serving the customer before pursuing the business. In marketing, the term
“lifetime value of a customer” was coined to understand the potential value that customer can bring to
the business in the long run, but there are obvious red flags which are collectively called customer
satisfaction costs: (1) Warranty because some products are as sturdy as they should be. (2)After sales
costs- some products or services require extensive technical support, installation and customer service.
 Being a market leader is difficult to sustain – If there are major customers purchasing the entrepreneur’s
product or services. If there are major players in the industry that control the majority of the distribution
network. If technology has changed the way the entrepreneur operates the business. If technology
replaces the need for the product/ service, and if the competitors can easily tap the market.
 Return on Investment (ROI) takes too long and too small – If the reports say that ROI is less than 25% in
the first three years of business operations. If there is additional capital for the production. Only less
than 50% of the capital required will be allocated to revenue-generating activities. If the present capacity
is also incapable to produce or handle new commitments. If there is an uncontrollable industry factor.

Components of Business Model Canvas

a) Value Proposition – A description of the goods or services that a company offers and why they are desirable
to customers. It is a promise of value to be delivered. It summarizes why a customer should buy a product or
use a service.
Example: “The number one bottled water brand by volume Nestle Pure Life Purified Water enhanced with
Minerals for Taste offers healthy hydration in a variety of sizes and is committed to helping families live a
healthy, active lifestyle.”
Unique Selling Proposition (USP) - A consideration presented by the seller as the reason one product or
service is different and better from another product or service. You can include the Product characteristics,
Price Structure, Placement Strategy and Promotional Strategy such as tagline.
Tagline – A short, memorable phrase that is used throughout your marketing. It should convey the main
sentiment or feeling that you want people to associate with your brand.
Example: “Pizza delivered in 30 minutes or it’s Free!” – Domino’s Pizza
Example: “Langhap Sarap” - Jollibee, “Just Do It” – Nike, “We Find Ways” – BDO

b) Customer Segmentation - the process of dividing customers into groups based on common characteristics so
companies can market to each group effectively and appropriately. It identifies the target market.
Companies often segment customers according to demographics that include:
 Age
 Gender
 Marital status
 Location (urban, suburban, rural)
 Life stage (single, married, divorced, empty-nester, retired, etc.)
  Customer segmentation requires a company to gather specific information – data – about customers
and analyze it to identify patterns that can be used to create segments (Murphy 2020).
 Data Gathering Techniques:
 Face-To-Face/ Telephone/ Chat/ Online Interview – a data collection when the interviewer
communicates directly with the respondents.
 Focused Group Discussion (FGD) – Group of people are gathered and shared their perceptions,
opinions, beliefs, ideas, and attitudes towards the product or service, concept, advertisement and
packaging.
 Surveys – Company prepared a survey questionnaire. Surveys may be done through paper
questionnaires or online via google forms.

c) Channels - describes how a company communicates with and reaches its Customer Segments to deliver its
Value Proposition. It is important to understand which pathway (or channel) is best for your company to
reach your customers (ATm Startup Aggieland Texas A & M University n.d.).
FIVE TYPES OF CHANNEL PHASES:
1. AWARENESS- how do we raise awareness about our company’s products and services? Advertising
(Word of Mouth, Social media, Newspaper, etc.)
2. EVALUATION- how do we help customers evaluate our organization Value Proposition? Surveys or
Reviews
3. PURCHASE- how do we allow customers to purchase specific products and services? Web vs. Brick
and Mortar or Self-Checkout
4. DELIVERY- how do we deliver a Value Proposition to customers?
Over the counter or Delivered/Catered
5. AFTER SALES- How do we provide post-purchase customer support?
Call center or Return policy or Customer assistance

d) Customer Relationships - The ways in which your company communicates and deals with existing customers.
Follow-ups build relationships aside from saying “Thank you”. Palin said, “Satisfying customers isn’t enough
to guarantee they’ll come back, you need to go above and beyond. That’s true whether you run a coffee
shop where regulars want to feel like a part of the family or an auto-parts company whose customers
demand high quality and responsive service.”
Six Tips to Create Good Customer Relationship (bdc n.d.):
1. Understand what your customer values – Listen to what they say, and how they say it and adjust
your approach to match their expectations.
2. Show you genuinely care – People want to connect beyond the professional level. Being friendly and
with a personal approach pays off.
3. Adapt to their pace – If customers in a hurry do not slow them down. If the customers want to chat
do not rush them.
4. Let your brand be your guide – Your branding and marketing make a promise and it is essential to
deliver on that. Do not fail your customers with your company’s promise.
5. Model the behavior you want to see – The way you treat your employees shows them how they are
supposed to treat your customers.
6. Remember that relationships are built over time – Exceed expectations. It is important to go above,
and beyond, you do not need to hit the home run with every conversation.
e) Revenue Streams –Revenue is the amount of money that is brought into a company through its various
business activities (e.g. sales of products and services). How will you find your revenue? For example, if you
sell 10 packs of ube-cheese pandesal per day for 120 per pack. Let us break down using this formula Number
of Goods sold x Price = Revenue.
Revenue Streams is the various sources from which a business earns money from the sale of goods or the
provision of services. The types of revenue that a business records on its accounts depending on the types of
 activities carried out by the business. The revenue accounts of retail businesses are more diverse, as
compared to businesses that provide services (Corporate Finance Institute 2015).
Revenue Stream is the building block presenting the cash a company generates from each Customer
Segment. It can be generated in different ways (Empower Women 2016):
 Sale of Physical Product – The customers pay cash for the product.
 Usage Fee – The customer pays a user fee for a particular service.
 Subscription fee – The customers pay for a particular service. Example Netflix Movie Subscription
 Lending/Renting/Leasing – The customer pays to use a particular product for a fixed period of time.
 Brokerage Fee – Company gets a revenue from an intermediate service. It is often used by real
estate agents, and credit card providers
 Advertising – Your company may charge fees for advertising a product, service or brand.
 Volume and Unit Selling – Your company charges a fixed price for a product however if the
customers choose to buy in a higher quantity, you may give them a discount or you may have a
different price for different customer segments.
Take note: You will need to decide what kind of Revenue Stream best fits your business.

f) Key Resources - The resources are needed to create value for your customers. These resources can be
categorized into four main categories (Empower Women 2016):
 Physical resources – raw materials, building, vehicle, transportation, storage facility, machines,
factory, and equipment.
 Human Resources – staff or employees (engineer or marketing expert)
 Intellectual Resources – brand, patent, copyright, partnership, customer database.
 Financial Resources – cash, credit, equity

g) Key Partners - The relationships that you have with other business, governmental, or non-consumer entities
that help your business model work such as suppliers, manufacturers, business partners, etc.

Four Types of Partnerships

1. Strategic Alliances between Non-competitors – You can partner with a manufacturer to produce a
part of your business product.
2. Competition – You can strategically partner with your competitor.
3. Joint Ventures to Develop New Businesses – You can join your company with another company to
create a new different entity.
4. Buyer-Supplier Relationship – You can build a reliable relationship with your buyer and supplier.

h) Key Activities - Any activities that your business is engaged in for the primary purpose of making a profit such
as operations, marketing, production, problem-solving, and administration. The Key activities of a business
represent what the company must do to make the business model work. These activities can be producing a
product or providing a service, or a mix of both (Epperhart 2015).
Two Major Types of Key Activities
1. Supply Chain Management – Supply chain comes in two places: Key Resources and Key Partners. Key
Resources are helping you manage your Key Partners.
2. Software Development – Today almost all business systems have been moved into software
processes. Computer software that helps you manage all of the pieces of a business that need to
operate and run.
i) Cost Structure - The costs and expenses that your company will incur while operating your business model.
Two Main Categories of Cost
1. Cost-Driven – Focuses on minimizing the costs of the product or service as much as possible.
2. Value-Driven – Focuses on creating more value in the product itself, not necessarily producing the
product at the lowest possible cost.
 Types of Cost (Murphy 2020)
1. Fixed Cost – Costs that do not vary with the level of output in the short term. Example: Rent, Office
Supplies, Advertising
2. Variable Cost – Cost varies in direct proportion with the level of output. Example: Raw materials,
Packaging costs, Labor cost
3. Operating Cost – Expenses associated with day-to-day business transactions. It can be variable or
fixed cost.
4. Direct Cost – Related to producing a good or service. It includes raw materials, labor, distribution
and expenses.
5. Indirect Cost – Unrelated to producing a good or service. Electricity used to power the plant is
considered as an indirect cost because the electricity is used for all the products made in the plant.

Forecast the Revenues of the Business

Revenue is the income obtained by a business from its sales of goods (referred to as sales revenue) or sales of
services provided to its customer (referred to as service revenue). Forecasting revenue goes hand-in-hand with
forecasting sales.

Revenue Forecast is the calculation of the quantity of cash that a company will receive from sales in products or
services during a particular time. The business revenue forecast is an essential part of business planning though it is
not intended to give actual figures for each year's earnings.

Purpose of forecasting revenue

1. Can help you discover why, when, where, and how of your sales activities.
2. It can assist you to come up with a better strategy to maximize your profit.
3. It can also help with your cash flow management through planning your capital needs to keep away from
lacking payments, dropping suppliers and investors, and adverse credit history.

4. It can assist to determine profit margin and contribution to gross profits.

5. It can manage production scheduling to prevent bottlenecks that would possibly cause lost income and
help to spot potential downtimes that cause to pay workers.

6. It can also identify peak hours.

SIMPLE STEPS TO FORECAST REVENUE

1. Choose which forecasting methodology primarily based on the business is needed, how much time you
have, and your degree of confidence in the data.

a. TOP-DOWN FORECASTING. It is a method of estimating a company’s future performance by starting

with high-level market share (your TAM-total available market), potential market share and down to
revenue.

For example, if your company is selling a Mobile Phone, you may look at the number of consumers who
have purchased mobile phones.
b. BOTTOM-UP FORECASTING- It is a method of estimating company’s future performance via starting
with low-level company data and working up to revenue.

**You can calculate the company’s estimated revenue by multiplying the number of orders and the average
price.
 c. QUALITATIVE FORECASTING- It is an estimation methodology that uses professional judgment
instead than numerical analysis. It depends upon the information of experienced and expert consultants
to provide insights into future outcomes.

d. QUANTITATIVE FORECASTING- It is a statistical approach to make predictions about the future which
makes use of numerical measures and prior results to predict future events. They are highly structured
on mathematical calculations.

2. Identify and break down your revenue drivers so that you can forecast them later. These are the metrics
that will drive your revenue:

● Salespeople

● Marketing

● Number of customers

● Average frequency of purchase (how often a single customer buys your product)

● Average purchase volume (how many products a single customer buys)

● Variety of products Amount sold of each product

● Prices of each product

● Sales cycle (how long from start to finish does it take a salesperson to close a sale)

3. Project the drivers and use the drivers to forecast the revenues. And compute the Sales Revenue.
Formula for Revenue:
Price of per unit x number of unit sold = revenue

#of Goods Price Daily Weekly Monthly Yearly

sold Revenue Revenue Revenue Revenue
10 Packs of 120.00 =1,200.00 1,200.00 x 1,200 x 30 1, 200 x
ube-cheese 7 = 8,400 = 36,000 365 =
Pandesal 438,000

Forecast Expenses Incurred

Businesses incur more than a few types of expenses. An expense is the cost of operations that a business
incurs to generate revenue (Liberto 2020). It is the cost of doing business; the sum of all activities that result in a
profit. It is necessary to recognize the distinction among expenditure, expense and cost. Expenditure refers to the
amount incurred in a long term period by the company to purchase and increase the value of fixed assets (Morah
2019). On the other hand, expenses refer to the costs that are ongoing payments incurred on a short term basis and
used to generate revenue. Cost, it refers to the amount of money spent on the production or creation of goods or
services (Cambridge Dictionary n.d.).

As the diagram above illustrates, there are several types of expenses. The common way to categorize them
is into operating vs. non-operating (Adkins 2019) and fixed cost vs. variable cost (Fresh Books Accounting n.d.).

OPERATING NON-OPERATING FIXED COST VARIABLE COST

EXPENSE EXPENSE

An expense a This is not related to An expense that An expense that

 business incurs in a company’s day- remains changes directly and
order to keep today operation or constant for a proportionally to the
running the manufacturing. period of time changes in business
operation. irrespective of activity level or
the level of volume.
outputs. Does This also refers to the
not vary directly actual costs of making
to sales. the product or
providing the service.
Payroll Depreciation Rent Transaction fees
Insurance fees Amortization Salaries and Commissions
License fees Bank fees wages Marketing and
Rent Lawsuit payments Loan payments advertising
Marketing and associated fees Direct labor
(advertising and Currency exchange Taxes
promotional fees) rate Costs of goods sold
Accounting fees Restructuring costs Materials and supplies
Building Obsolete inventory Packaging
maintenance Interest
and repairs Taxes
Utilities
Attorney’s fees
Property Taxes
Travel expenses
You must forecast each expense of the business including:

Startup Expenses- These are the expenses incurred for the duration of creating a new business such as pre-operating
expenses (Morah 2019).

Fixed Costs - All the overhead costs of the business.

Variable Costs - All of the costs that vary with the business.

Compute Profits
The terms "profit" and "income" are often used interchangeably in day-to-day life. Profit is generally understood to
refer to the cash that is left over after accounting for expenses (Kenton 2020). Computing a profit or loss has to be
completed by all companies of any size, form the small enterprise to large enterprise. It is in a simple calculation
Total Revenue – Total Expenses = Profit.
1. Compute all the revenue from sales of goods and services
Example: You owned school supplies. September 1, 2020, you sold 10,000 worth of bond papers to Sapang Bato
National High School. September 2, 2020, you sold to Angeles City National Trade School 10,000 worth of bond
papers and to Sapang Bato Elementary School 15, 000 worth of ink and bond papers. September 3, 2020, you sold
10,000 worth of school supplies from various customers.

DATE ITEM/S AMOUNT

September 1, 2020 Bond Papers 10,000

September 2, 2020 Bond Papers and ink 25,000

 September 3, 2020 School Supplies 10,000

Total Revenue
45,000
2. Compute all the costs and expenses for the accounting period (1 month).
For example: Let’s say your school supplies business spent 3,500.00 for paying your store rentals and 2,000.00 for
your saleslady salary. In this case, your total expense is 3,500.00 + 2,000.00 = 5,500.00.

3. Subtract all the expenses from the revenue. You just simply subtract your expenses to your sales revenue.
The money left represents your business profit. In the example, you already computed your total revenue
and total expenses from your school supplies business. Subtracting your total expenses from your total
revenue gives you 45,000 – 5,500 = 39, 500 profit.
4. Note that a negative result for profit is called net loss.