Business modelling and forecasting cash to build resilience
As accountants, we want our clients to build resilient and successful businesses. That means overcoming the challenges and pursuing the opportunities presented by current market conditions. Leaders of resilient businesses ensure they understand their market, especially the customers and competition.
Some leaders have an ‘innate sense’ about their market; a ‘gut feeling’ about their customers and ‘how things work’. However, we should periodically revisit our assumptions, especially when conditions have been influenced by recessions, pandemics, regulatory change, wars, or similar events. “Market understanding” sounds complicated so let’s break it down to a few simple questions.
What exactly do we mean by ‘market’?
A market is the group of individuals or businesses who share an interest in buying your product and have the ability to do so. The customers you want to sell to within this group are your target customers.
What should I know about my target customers?
A starting point is to define their attributes. Are they individuals or businesses? In any particular industry? What size of business? How many employees? In what location? What stage of development (start-up or mature)? What business problems do they need to solve? Any other specific attributes of your customers?
What do my target customers want from me?
That’s really important and we call it customer needs. On the face of it, it’s simple. A customer shopping for groceries has a need for food… but it gets more complex. Maybe that customer specifically wants healthy food or fresh food. Perhaps they are buying for a family meal, an individual meal or a large party. In each case, their needs will differ.
Another example: someone buying a car needs a means of transport. But someone buying a Ferrari may have other needs such as prestige, status, and/or exhilaration. Understanding this is important in making decisions on marketing, selling, pricing, product development, and so on.
Do the needs of customers change?
They don’t change very often and changes tend to be subtle. Take the person shopping for food. Whether they are 20, 40, 60, or 80 years old, their basic need is still to buy food but their preference for what food to buy may evolve over time due to health, budgetary or nutritional needs.
Sometimes needs shift quite quickly. Example: In a pandemic environment, the need for business travel might disappear. If you are a travel agent, your customers’ needs have shifted significantly. That raises the next question…
Are changes to customer needs temporary or permanent?
It’s true that a change in customer needs can be temporary and things will ‘bounce back’. But markets evolve over time and every industry experiences disruption at some point… It’s just a matter of time.
What about the competition?
Business is challenging because it’s not just about you and your customer. Competitors will take your customers at the first opportunity so we need to understand them also. Perhaps you compete with a few businesses (like a manufacturer of aircraft… there are relatively few of these) or perhaps your market is very fragmented, meaning there are many competitors (like a manufacturer of shampoo. Count all the options on the shelf next time you’re at the store!!)
Your competitors might operate very similar businesses to you OR they may look quite different. For example, a dealer in family vehicles will probably compete with other dealers selling family vehicles, NOT sports cars or utility vehicles. But a seller of ultra-luxury sports vehicles may compete with sellers of luxury yachts, luxury vacations, or other solutions targeting that elite segment. We need to get clear on this.
Has the competitive environment changed?
Competitors will come in to go. Sometimes economic conditions will eliminate certain competitors or a change in regulations will allow new competitors in. Resilient businesses are trying to maximise their market share so they need to understand shifts in the competitive environment. Example: A business that has traditionally offered education through brick and mortar schools might experience increased competition from providers of ‘online learning’. The competitors may secure enough market share that the operator of schools can no longer compete. In that case, they’ll need to make drastic changes to their business model.
As accountants, we need to ask these questions of our clients to help them evolve their business models, forecast cash, and build resilience. Arriving at sensible assumptions on the above questions is critically important.