Russell McGuire

Over the past month+, we’ve looked at six questions that every leader needs to be prepared to answer about their business. Along the way we’ve studied the business’ purpose, non-negotiable principles, customers, competitive strategy, value proposition, business model, revenue model, operations model, and strategic initiatives. All simply by asking six seemingly simple questions. 

The questions may be short, and the answers may even be crisp and concise, but the work required to be ready to give an answer is far from trivial. In fact, that work, the lessons learned, and the direction provided are what make asking these questions so critical to the success of any business.

I hope these simple questions, and understanding what it takes to be prepared to answer them, have been a blessing to you. May you be blessed with wisdom, knowledge, and understanding!

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Obviously, initiatives must be well managed to be successful. Project management and scorecarding are two mature disciplines that can play a significant role in ensuring initiatives remain on track.

Today’s article talks about these disciplines and the overall process of monitoring strategic initiatives.

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Major initiatives often involve change, which can be challenging to manage, and the specific nature of the initiative will impact how we think about and manage the work to be done. Specifically, I think it’s helpful to identify which initiatives are starting something new, which are stopping something old, and which are enhancing an existing capability.

The definition of initiative is “an introductory step” and many initiatives involve starting something new. Tools used by startup businesses can prove helpful when launching new ventures within an existing organization.

Stopping existing activities may not be as much fun as starting new things, but you might be tempted to think that stopping is easier than starting. Often, that’s not the case. Stopping one aspect of operations can impact customers, partners, and other parts of the operations, sometimes in surprising ways.

Some initiatives involve implementing plans to change the investment mix in the organization — defining where to invest and grow and where to merely maintain the current position. In general these types of initiatives are less complex and lower risk than those involving starting or shutting down operations.

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We’ve spent the past several weeks talking about the first five questions every business needs to be prepared to answer. The sixth and final question “what do you need to do right now?” implies that we need to get to work, but what do we prioritize?

In this article I recommend three frameworks for identifying initiatives worth pursuing: the purpose pyramid, the customer value map, and the cash cycle. Hopefully these three frameworks can help us identify a good list of potential work to do. But, there’s a good chance we can’t do it all, at least not right now. Raking the projects based on strategic alignment, financial impact, and specific resources required enables us to identify those that we can do with the resources available.

So by using these three frameworks, we can identify work that could be done. By prioritizing those projects, we identify the most important work to get done. And based on the resources we have, we select the work that we will do.

Tomorrow we’ll talk about actually doing that work. 

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We’ve come to the last of the six questions that every business needs to be prepared to answer. What do you need to do right now? It can’t be answered without doing the work of answering the first five questions: Why does your business exist? What principles will you never compromise? Whom do you serve? Why do customers choose you? How do you make money?

Doing without understanding is like wandering in the dark. You’re not likely to make meaningful progress. But understanding without doing is just as unproductive.

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Throughout the week we’ve been looking at different aspects of the question “how do you make money?”. We’ve looked at revenue models, business models, and operating models, and along the way I’ve dropped hints about the linkages between those activities and cash flow, but today I want to focus specifically on how cash flows through a business.In today’s article I introduce a “cash cycle” – like the water cycle in nature, but showing how cash flows through a business. We then look at how elements from that cash cycle show up in a company’s income and cash flow statements and how we can determine whether or not the business has healthy cash flow.

Here are some important questions I try to answer from a company’s income statements:

• Are sales increasing?
• What is the gross margin? Have they set their prices high enough to support the business?
• What is the trend on EBITDA margins? Are they keeping operating expenses in line with revenues?
• Are they profitable (Net Income)?

The important questions I try to answer by looking at cash flow statements include:

• Is the business generating or consuming cash?
• Is cash flow improving or getting worse?
• Is the cash flow from Operating Activities positive or negative?
• If operations are consuming cash (negative cash flow from Operating Activities), what is the monthly burn rate, and given how much cash the business has on hand (from their balance sheet), what is the runway (how long until the business runs out of money)?

As you can see, the question “how do you make money?” is a more complex question than it appears on the surface. Hopefully this week’s articles have given you a good sense for how to manage your business to make sure that you can answer the question with confidence for today and the future.

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There seems to be pretty good consensus that a business model can be defined as “how a business creates value for its customers and captures value from its customers.” 

I have found it helpful as I work with teams, especially in the earliest stages of business conception and formation, to break the business model into these two main functions (value creation and value capture). The operating model is what I call the value creation portion of the business model. The revenue model is what I call the value capture portion. You may have slightly different definitions for those two terms, and that’s okay.

In yesterday’s article I introduced the revenue model. In today’s article, we mostly talk about the operating model. Together, they make up the business model.

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Startups are often asked “What is your business model?” Most of the time, the real question is “What is your revenue model?” 

The revenue model defines how a business captures value from its customers. 

Deciding how much to charge whom for what is a big and important issue for any company to resolve. Determining when to get paid and in what form can strongly impact your product growth and even why and how people adopt your product. 

Since revenue is the fuel that keeps the business engine running, getting these decisions right can be the difference between life and death for startups.

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The fifth of six questions that every business should be able to answer is “how do you make money?”. When I ask leaders this question I typically hear one of two types of answers: where their revenue comes from, or how they manage to profitability. Both answers are really important and which one they give even tells me a lot about their business.

I think it’s important to understand the difference between a revenue model, a business model, and a cash flow model. 

Entrepreneurs are often asked “what is your business model?”. In most cases, I think the one asking the question really wants to know the startup business’ revenue model. Especially amongst tech startups, the term “business model” is often used to describe who pays and how they pay. The answer expected might be “we have a subscription-based model” or an “advertising-based model” or perhaps “ours is a two-sided platform model”. But these don’t really reflect an entire business model.

The simplest definition of a business model is “how a business makes money”, but a more effective definition is “how a business creates value for its customers and captures value from its customers”. The revenue model is the portion of the business model that explains how the business captures value from its customers. It is also important to deeply understand how cash flows through the business. 

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This week we started by deeply understanding your customers and your competitors. Next we sought the right category for your product, and the right competitive strategy for your business. Today, we bring all that together into a single sentence and a single diagram.

The product positioning statement provides a clear, concise, and compelling case for the unique reason customers should buy your product rather than choosing rival options. The Customer Value Map provides a framework supporting that positioning statement within the context of the target customer profile.

These two tools provide a powerful answer to the question “why do customers choose you?”.

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