The Value Equation

Chapter 4Three More Variables and Voilà!

Businesses have nearly infinite operational possibilities. A company always starts with an idea that can be sold, such as an internet search engine algorithm or a clothing line. Then that idea or business model must first be expressed in terms of an income statement. What are the start-up costs? What is the cost to produce and deliver the product? How will the product be priced? How much will the corporate overhead be? If your business requires real estate or equipment, how much money will be required every year to maintain or replace assets used in the business?

Operational questions pertaining to business investment are no less numerous. How will your product be made? How much real estate and equipment do you need to make the product? Can you outsource any of the product manufacturing? What are your inventory needs? Do you have to provide deposits against inventory orders? Can you get terms from your trade vendors? How fast will your customers pay you? Can you get customer deposits?

In all business models, there is a cycle of interdependence. Operational fundamentals reflected in your income statement are key to the determination of your business investment and OPM, which comprise the first three universal business model variables. In turn, your business investment and OPM are impacted by the income statement, which is the source of the final three universal business model variables.

We have already discussed the three variables pertaining ...