An Integral Part Of The Business Plan Is To Develop A Busine

An Integral Part Of The Business Plan Is To Develop A Business Model

An integral part of the business plan is to develop a business model. Simply put, a business model describes how a company plans to make money. It is not what you do, but how you will make money doing what you do. A solid business model is the link between venture strategy and financial plans. Projecting the financial performance and requirements can be classified as financial goals of the venture. A venture capitalist will want to know not only the numbers, but how those were derived. For this professional assignment, you will develop both a business model and financial goals for your new venture. Develop and submit the following: Define the business model of your venture company, explaining why it is you have selected this business model as the ideal model for your venture. Create a five-year revenue projection and illustrate how you have come up with the projected numbers. Develop a five-year pro forma P&L statement and justify your assumptions within the statement. Devise a five-year pro forma cash flow statement and justify your assumptions within the statement. Design a five-year pro forma balance sheet and specify how the balance sheet relates to the other two financial statements in parts (2) and (3).

Paper For Above instruction

Introduction

A comprehensive business plan hinges on the development of a robust business model that aligns with strategic goals and financial projections. The business model offers a blueprint for how the venture will generate revenue and sustain profitability over multiple years. This paper details the chosen business model, the rationale behind its selection, and provides detailed financial forecasts, including revenue projections, profit and loss statements, cash flow analysis, and balance sheet projections for five years.

Development and Explanation of the Business Model

For this venture, the selected business model is a subscription-based e-commerce platform focused on eco-friendly home products. This model was chosen because it aligns with current consumer trends favoring sustainable living and online shopping convenience. A subscription-based model provides predictable revenue streams, high customer retention, and opportunities for upselling and cross-selling. The model also facilitates scalability, essential for long-term growth, by allowing installment of recurring revenue cycles and customer data collection for targeted marketing.

The subscription approach ensures a consistent cash inflow, which improves financial stability. Additionally, the digital nature of the platform reduces overhead costs associated with physical storefronts, making it an ideal model for a startup aiming for rapid expansion. The model's flexibility allows customization of packages depending on customer preferences which further solidifies customer loyalty.

Five-Year Revenue Projection and Derivation

The five-year revenue projection anticipates growth driven by customer acquisition, retention strategies, and expansion of product lines. Starting with an initial subscriber base of 2,000 customers, with a projected annual growth rate of 25% in new customer acquisition, revenue is expected to increase substantially.

The average subscription fee is projected at $30 per month in Year 1, increasing nominally with inflation and added services. Year 1 revenue is calculated as:

2,000 customers x $30 x 12 months = $720,000.

Assuming a 25% growth rate annually, subsequent years' revenues are projected as follows:

- Year 2: 2,500 customers, revenue = $900,000

- Year 3: 3,125 customers, revenue = $1,125,000

- Year 4: 3,906 customers, revenue = $1,406,250

- Year 5: 4,883 customers, revenue = $1,837,500

This growth pattern assumes effective marketing, high customer retention, and expansion of product offerings to increase average revenue per user (ARPU).

Five-Year Pro Forma Profit and Loss (P&L) Statement

The P&L statement evaluates profitability based on revenue, cost of goods sold (COGS), operational expenses, and taxes. Assumptions include a steady gross margin of 60%, with COGS accounting for 40% of revenue. Operating expenses encompass marketing (10% of revenue), salaries (30%), technology maintenance (10%), and general administrative costs (5%).

Projected gross profit increases proportionally with revenue:

- Year 1: Revenue $720,000, COGS $288,000, Gross profit $432,000.

Operational expenses total around 55% of revenue, i.e., approximately $396,000 for Year 1, leading to an operating profit of $36,000 before taxes. Costs are expected to rise moderately with inflation but remain efficient through scale economies. After accounting for taxes, net profit margins stabilize around 5%.

Year 2's profit reflects increased revenue, with expected net profit of approximately $56,250, growing in tandem with revenue increases in subsequent years.

Five-Year Pro Forma Cash Flow Statement

The cash flow statement tracks cash inflows and outflows. It starts with initial investments covering platform development, inventory, and operational costs. The projection assumes positive cash flow commencing from Year 1, driven by revenue collections, with reinvestments into marketing and product development.

Inflows primarily derive from subscription payments, while outflows include operational expenses, marketing spend, and capital expenditures for platform updates and inventory management. The assumption is that operational cash flow will improve over time with increased customer base and revenue.

The positive cash flow in Year 1 is projected at $50,000, increasing to over $250,000 by Year 5 due to economies of scale and efficient cash collection practices.

Five-Year Pro Forma Balance Sheet and Its Relationship to Financial Statements

The balance sheet reflects accumulated assets, liabilities, and equity over five years. Assets comprise platform intellectual property, inventory, receivables, and cash reserves. Liabilities include short-term loans, credit lines, and accounts payable, decreasing proportionally as revenue grows.

Equity increases as retained earnings accumulate, driven by profitability. The balance sheet is directly linked to the P&L statement through net income, affecting retained earnings, and to the cash flow statement through cash and working capital management. For example, increased revenue and profitability lead to higher cash reserves and equity.

As the venture progresses, the balance sheet demonstrates a healthy financial position, with assets outpacing liabilities, underpinning the sustainability and growth prospects of the business model.

Conclusion

The chosen subscription-based e-commerce platform offers a scalable, predictable revenue model aligned with current market trends and consumer preferences. The detailed financial projections—spanning revenue, profit & loss, cash flows, and balance sheet—are based on rational assumptions, market analysis, and growth strategies. Together, these financial statements illustrate the viability and strategic foresight necessary for attracting investment and guiding the venture toward sustainable success.

References

  1. Chesbrough, H. (2010). Business model innovation: Opportunities and barriers. Long Range Planning, 43(2-3), 354-363.
  2. Osterwalder, A., & Pigneur, Y. (2010). Business Model Generation. John Wiley & Sons.
  3. Johnson, M. W., Christensen, C. M., & Kagermann, H. (2008). Reinventing your business model. Harvard Business Review, 86(12), 57-68.
  4. Teece, D. J. (2010). Business models, business strategy and innovation. Long Range Planning, 43(2-3), 172-194.
  5. Rappa, M. (2003). Business models on the web. Journal of Economic & Social Research, 4(1), 1-20.
  6. McGrath, R. G. (2010). Business models: A discovery approach. Long Range Planning, 43(2-3), 247-261.
  7. Casadesus-Masanell, R., & Ricart, J. E. (2010). From strategy to business models and onto tactics. Long Range Planning, 43(2-3), 195-215.
  8. Kim, W. C., & Mauborgne, R. (2004). Blue ocean strategy. Harvard Business Review, 82(10), 76-84.
  9. Clayton, C. M. (2018). Financial analysis and decision making. South-Western College Publishing.
  10. Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2018). Fundamentals of Corporate Finance. McGraw-Hill Education.

Related Assignments