Business Model Innovation - New Business Opportunity Financial Modeling
Project Example | Nonprofit Business Model Innovation
Financial modeling of new business opportunities
Context
To improve its resilience in the face of core funding fluctuations, my client was seeking to diversify income sources with new business lines employing market-based business models. It had identified several promising opportunities, and sought to understand the likelihood of each meeting a stated profitability hurdle.
Key Question
Can our business idea(s) generate $X in unrestricted resources within 5 years?
Solution
I developed pro forma financial models depicting defensible scenarios to help my client understand the financial opportunity offered by each idea. Activities included:
- Construction of financial model spreadsheets.
- Identification of key business drivers.
- Research and analysis to make defensible driver assumptions.
The key to success in this process lay in my approach to financial modeling when the business ideas were only at concept stage. This approach involves a two-stage question:
- What are the unit economics? That is, what are the average revenue, gross margin, customer lifetime value, and customer acquisition cost of the business model. Each of these key drivers can be benchmarked, calibrated and pressure-tested for reasonableness based on the particulars of the business idea.
- What is the scale required to meet financial goals? Based on the unit economics, what implied scale is required to clear financial hurdles (e.g., a profit target) required to make the investment attractive? The reasonableness of the required volume and growth rates can be considered against total market size, competitive dynamics, industry sales cycles, and other points of perspective.
Results
The financial models were critical inputs in my client's decision to pursue two of the four new business opportunities.
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