A business model is the plan prior to starting your venture. And it starts with having a defined goal.
According to León Velázquez, director of strategy at Tecmilenio University, the main mistake an entrepreneur makes is falling in love with his idea, the one he has dreamed of and worked on, without opening up to other points of view.
“The entrepreneur has to fall in love with the problem, not with his idea. Falling in love with the circumstances and what the client is experiencing so that he is able to solve it ”.
How to make a business model?
According to Velázquez, to make a business model the first thing to do is have a defined goal.
“It is the main part, what you want to maximize with the business. If the objective is based on people, this makes a difference”.
So when the initial focus is a tangible benefit to a group of potential customers, the business model starts off well.
“This also gives the work team a purpose of service,” says Velázquez.
Another aspect that this expert points out is that it is not enough to trust the ideas embodied in a graph, finally, nothing else governs the laws of addition and subtraction, but reality is much more complex.
“A business model can work in Excel and then fail in real life. It has to be explained as if it were a story, especially when presenting the business case (feasibility study) in front of a group”.
Only when the idea is well articulated, referring to strengths, weaknesses, market niche and competitors, can it be told fluently. This already gives some guarantee that in reality it does work well.
Even if the story is told consistently and gets the go-ahead from partners or investors, the job isn't done yet. Follow the test phase.
“The model must be validated with customers, offering them an initial version of the product or service. And this must be done with the attitude of accepting corrections and reasons why the prototype could be wrong”.
Once the adjustments are made based on the observations of the clients, then the business model is shown to the partners or investors and if there are no objections, it is time to put it into practice.
The pandemic left a negative economic balance in Mexico in 2020 with a drop of 8.5% in national production, in addition the outlook for 2021 is that the Gross Domestic Product (GDP) will grow by 5%, according to estimates from the Monetary Fund International and the Ministry of Economy. With this panorama, how to recover from an economic crisis?
One feature that stands out in the gloomy panorama is that people did not get into debt and, on the contrary, increased their savings.
The National Survey of Financial Inclusion shows that the percentage of people who save actively increased 17 points, going from 51% of the entire adult population to 68%.
“Bank customers have preferred to save rather than take on credit to the private sector. At the end of 2020, bank deposits grew 9.7% while credit to the private sector fell 1.3% in annual terms,” explains Juan Luis Ordaz, director of Financial Education at Citibanamex.
Before starting you should know about the flow of capital
The flow of capital or capital cash flow is that which is used for regular operations of the company or investment. Even within financial language it has taken different classifications.
Everything starts with your company's profits and losses, which according to Ricardo Rangel, financial analyst and Founding Partner of Finance Thierry, capital flows give you a snapshot of management to assess who you owe, what you have done and what you have not done in your company with the resources you have.
"If you don't have cash, or money, you can't make decisions to invest or take certain risks... in the pandemic this became evident, how the cash flow of companies was weakened the most, especially MSMEs" , explains Rangel in an interview for Tec Review.
Capital Cash Flow
It is related to the operation of projects and businesses where there is a certain level of indebtedness, to later determine the impact of the contributions destined to pay creditors and share owners.
That is, it is the amount of money that a company generates in a given period to pay creditors and dividends to shareholders.
Contemplates net income adjusted for expenses that do not represent a flow, including changes in working capital and capital expenditures, according to the definition given by AD Tec Business Consulting specialists.
Free Cash Flow
Represents the flow of funds generated by the company regardless of how it is financed.
Free Cash Flow is defined as an after-tax basis, before deducting financial expenses such as interest.
"As an alternate source of your Free Cash Flow, well, obviously it's your financing...because maybe you need to finance that working capital to continue operating the company, as happened in the pandemic," says financial analyst Ricardo Rangel.
Equity Cash Flow
Represents the company's residual cash flow, after interest and taxes have been paid.
According to the definition of Aurelio Garcia del Barrio Zafra, PhD and director of the MBA at the Instituto de Estudios Bursátiles (IEB), it can be obtained by subtracting interest and adding or subtracting, as appropriate, the changes in indebtedness to Capital cash flow.
New business models
The pandemic brought with it great changes in the way of doing business in Mexico and in the world.
Millions of people lost their jobs and millions of businesses closed; The question for those who were affected and for those who survive is where to look in terms of new business models.
We talked with two specialists who gave us advice on how to see the new world that the pandemic brought us, in order to generate new business ideas.
Miguel Pallares, a business journalist who has closely followed the new trends in the economic and financial world in recent years, explains that, more than advising specific sectors or business models, what is required are new skills and new approaches to face the future challenges of the economy.
He comments that, throughout conversations with different national and foreign CEOs, and seeing how companies listed on the Mexican Stock Exchange are adjusting to the post-pandemic economy, he has realized that new businesses need people that work the internet and communications on the new digital platforms.
He explains that the new conditions such as the home office and the need to offer goods and services through the Internet and applications generate the need to have people trained in handling different computer programs, as well as digital skills such as artificial intelligence, machine learning or blockchain.
For this reason, he advises entrepreneurs that –regardless of the economic sector they want to dedicate themselves to– incorporate these trends in order to gain customers and market share.
He explains that another aspect of the new business models has to do with producing from sustainable sources and methods, since even many investment funds are increasingly taking into account in their financing plans supporting companies that bet on energy cleanliness and sustainability.
He commented on the case of Bimbo as an example: “they are betting on compostable packaging. For what reason and what do I do to learn from this and incorporate it into my business?
For this reason, the renowned journalist recommends that those who want to venture into new business ideas take a look at the annual reports of large national and international companies, so they can see where they are betting to consolidate themselves in the market.
Miguel Pallares calls on those who want to venture into new business ideas not to forget the fundamentals of business management.
He says that it is essential to know the sector in which you want to venture, which are the areas with the highest profitability, how much the market is worth, how saturated it is, its recent growth rates and its future projection.
Also, another piece of advice that he gives is not to forget about finance and accounting in new business ideas, since ignoring this can be a source of failure.
“There are people with very good ideas or with spectacular products or services, but who spoil their businesses because they ignore certain basic financial concepts such as operating income, gross margin, earnings before taxes, net income, assets or liabilities. And to this is added the mismanagement and lack of accounting management. That is why they do not project well, they spend more than their capacity, they get into debt and then, since they do not obtain the desired income, they go bankrupt”, explains Pallares.
Some examples of a business model
A trend that was growing in the country, but which was strengthened by the pandemic, was the issue of retail financial investments.
This model means that people can use a platform linked to an entity regulated by the financial authorities of the country, such as the National Banking and Securities Commission or the Bank of Mexico, so that they can enter the world of investments in financial assets such as bonds and shares, both national and international.
Ricardo Rangel, founder of Thierry Finanzas, tells Tec Review that many people saw this as an opportunity, since they were fired from their jobs, and decided to take advantage of both the money from their settlement and their more time available to enter the world of investments, which allowed them to have an additional income.
However, he adds, entering this world means being prepared, because you need to know a lot of information about the Institutional Stock Market, the Mexican Stock Market, other international stock markets and the companies that participate in these markets.
This in order to decide what action, bond or asset can be invested in, which depends on the performance of different markets and different companies in the country and in the world.
He comments that the people who take advantage of these platforms linked to regulated brokerage firms, and who can start investing with little money, he calls minority investors.
“My recommendation for anyone who wants to enter this world is to verify that the investment platform is linked to a regulated entity and that it has the approval of the Mexican Association of Stock Market Institutions (AMIB). With that, you are certain that you are going to invest in an entity that is regulated here in Mexico”, he expresses.
Rangel clarifies that he does not consider investment, but rather a bet, to put money in crypto assets such as Bitcoin, since they are not regulated and there is a lot of risk if you do not have enough experience in how it works.
As a second example of a business model, Rangel explains that the pandemic affected all companies in general, but those who hit the hardest were those whose business depended on crowds of people. For this reason, among the big losers from Covid-19 were restaurants.
Therefore, he says that the digital boost given by the pandemic to avoid contact between people benefited the business model of dark kitchens, which are places that produce food for the purpose of making home deliveries and that have the characteristic of that they do not have dining rooms or serve customers in their place.
He explains that online restaurants have tended to be a noble business, as delivery platforms can be used to boost business.
“If you know how to cook and with good seasoning, you can take advantage of that talent at home to earn an income. It is not that you are going to become a millionaire right away, but it serves as a business model, to survive and generate growth over time” explains Rangel.
Rangel comments that digital transformation is key to new business models, that is, they must be open to operating online and receive digital or online payments.
He explains that the key to taking advantage of this transformation in new business is that new experiences must be generated for customers, and that whatever the entrepreneur is dedicated to or likes, the objective must always be to generate value or plus in the product or service being offered.
For example, a button. In this case, the impact of science and technology on business: when the researcher Martín Aluja Schuneman and colleagues demonstrated with scientific evidence that the Hass avocado did not harbor the larva of the fruit fly.
With this discovery, it was possible to open it in 2011, after 80 years of blockade, its export to the United States and the benefits resulted in billions of dollars.
Looking for new ideas? We tell you about the impact of science and technology on business
For example, a button. In this case, the impact of science and technology on business: when the researcher Martín Aluja Schuneman and colleagues demonstrated with scientific evidence that the Hass avocado did not harbor the larva of the fruit fly.
With this discovery, it was possible to open it in 2011, after 80 years of blockade, its export to the United States and the benefits resulted in billions of dollars.
The researcher at the Institute of Ecology, A.C. (Inecol) who, from his time as an agronomist student at the Tec de Monterrey, was clear that it is important that knowledge be useful to society and that it reaches a commercial stage to promote the economic development of the country, reports that the experience has been bittersweet.
He says that the following generations of avocado producers canceled the research collaboration they had with Inecol.
The options to continue studying this green fruit –and find innovations to optimize its cultivation– are many and necessary, because if history has shown anything, it is that the bonanza is ending, says the Mexican scientist.
Some of this research, says Aluja Schuneman, has to do with producing avocado organically, generating products that control diseases and pests that are not so aggressive to the environment, efficient forms of irrigation to reduce the use of water, generating resistant varieties with wild avocados and more.
The doctor in entomology from the University of Massachusetts recognizes that this collaboration could have been a virtuous circle that would trigger other success stories among a productive sector with a very specific problem, frontier research carried out in a public research center and government support.
“The problem is that the vast majority of the Mexican population ignores the benefits of science. And we can see it with the producers of berries, tomatoes and other products where the constant is that they buy developments from abroad”.
Considering the great Mexican biodiversity, the need to strengthen agricultural activity and the serious environmental problems facing humanity, the researcher promoted the creation of the BioMimic scientific and technological Cluster where he proposed working hand in hand with the public research centers of the National Council of Science and Technology and the private initiative.
“It has survived thanks to the resources it received in the past, but when these run out, due to the maintenance of equipment and facilities, it can become a white elephant as has happened with other infrastructures,” he laments.
Although very high-quality scientific research is carried out that has led Mexican researchers to publish in refereed journals such as Nature and Science, it has not been possible to consolidate an ecosystem of innovation that results in the creation of technology-based companies.
“The academy-industry-government link is very weak, there is no business culture of looking to the scientific and technological sector to solve their problems and scientists do not have the training or culture to understand the language of businessmen” , comments Martín Aluja Schuneman.
Innovation ecosystems such as Silicon Valley, in California, are characterized by having very creative young people, mature people who can guide these young people, a financial sector (angel capital) willing to risk resources and link a specific demand with a tax incentive.
How to recover from an economic crisis
The pandemic left a negative economic balance in Mexico in 2020 with a drop of 8.5% in national production, in addition the outlook for 2021 is that the Gross Domestic Product (GDP), according to estimates by the International Monetary Fund and the Ministry of Economy.
With this scenario, how do you recover from an economic crisis?
Juan Luis Ordaz, director of Financial Education at Citibanamex, explains that micro, small and medium-sized enterprises (Mipymes) are vital to the Mexican economy since they are 99.8% of the companies in the country, their contribution to GDP is 52% and group more than 70% of formal jobs.
According to the Business Demography Study carried out by INEGI in 2020, of the 4.9 million MSMEs, 3.9 million survived the pandemic, 79%. And 619.00 new ventures arose.
“Without a doubt, the most affected were the MSMEs because many times they do not have the financial support or adequate administration to face a significant reduction in sales,” says Ordaz.
With the closure of companies, 2.9 million jobs were lost. Of the new companies, there is a balance of 1.2 million new jobs.
Adaptation
The keyword of the companies that managed to stay afloat has been adaptation, since six out of 10 of these MSMEs had to implement some type of strike, either partial or total, and half of these businesses had to close for more than 21 days.
The confinement and the restriction of coexistence led entrepreneurs to digitize their business, an issue that may be trivial for the new generations, but is a challenge for entrepreneurs of the baby boomer and X generations.
“In two or three months these businesses had to have adapted because otherwise the cash flow management of the companies' income would not allow them to survive longer,” explains Gretel Cervantes, a doctoral student in public policy at the Center for Economic Research and Teaching (CIDE).
What did it involve? The acquisition of hardware and software to offer your products on various online sales platforms and learn how to use them.
In addition to offering home delivery; diversify the forms of payment: cash, bank transfer, card payment, monthly payment without interest; new communication channels through social networks, email and Whatsapp; modify their business according to the demand for goods and services and new marketing strategies.
Learning about finance and administration
Gretel Cervantes indicates that MSMEs have the challenge of learning basic notions of finance and administration in order to have healthier companies.
“We have to start by distinguishing between money and company capital. It is a very common but very serious confusion”.
Money serves as a means of payment to cover personal needs through products or services.
It only works as a medium of exchange but it can be converted into capital when it is used to generate more money, when it is invested in a business.
And the ultimate goal of capital is to generate more capital, says the finance professor at the Tecnológico de Monterrey, Mexico City campus.
She says that she was part of the team that designed a course and business project for L'Oréal, a company in the beauty sector with a worldwide presence.
“In said company they have realized that many of the aesthetics to which they are directed do not have a good management of finances. Entrepreneurs in the field of beauty do not know how to distinguish between their money and that of aesthetics, they think it is the same”.
In the courses they address topics such as evaluating the profitability of a business, understanding the flow of money, comparing it in the same terms to see if it is viable or not.
“People venture to start a business, but they have no idea how much they expect to earn, at what rate to value the projects and let's not go that far, many times they don't know how to use their credit card or how to request a loan. In the end, although those of us who study finance see these topics, they are basic mathematics: addition, subtraction, division and multiplication that should be the domain of entrepreneurs”, indicates Cervantes.
Getting to know the company
Micro, small and medium-sized companies are classified according to the number of employees: micro are those with one to 10 employees, small ones from 11 to 30 in the commercial and industrial or service sectors up to 50; and the medians are those with 31 to 100 workers in the commercial sector, from 51 to 100 in the service sector, or from 51 to 250 in the industrial sector.
The issue is that MSMEs are characterized by having a family structure, usually the members of a household are the employees of the business.
Their capital comes from the owner of the company or family members. Their decisions do not correspond to a business plan but are more intuitive. Hence, most do not survive more than 10 years.
Those businesses that survived this economic crisis will be worthy of study by the academy, acknowledges Gretel Cervantes.
Find out which resources were exploited and their resilience from a psychological, marketing and management point of view.
How to grow your business? The EXATECs tell you
During the Covid-19 emergency, one million businesses closed their doors. This figure was the result of the death of hundreds of businesses that had to lower their curtains permanently or that had to considerably reduce their operations to avoid contagion, with the consequent loss of millions of jobs or families who saw their disposable income fall.
Infographic about the companies Estación Cereal and La Flor de Jamaica.
Two EXATECs tell us how they turned the crisis around and how they have managed to grow their businesses.
Estación Cereal: looking for digital clients
Estación Cereal was a company founded by Andrea Barrales, a Tec political scientist, along with two engineering partners who also graduated from the same institution.
The business arose during a trip to Spain, in which Andrea saw that clients had experiences with different cereals from many countries, different from the traditional ones of multinational companies. So, the idea arose why not implement such a twist in Mexico City.
It was then that Andrea, knowing that she was not comfortable in her job in Godín, decided with her partners to open – little by little – branches in three strategic points of the city: Coyoacán, Roma and Condesa.
They began by importing cereals from the United States, Asia and Europe and offered experiences to customers that gradually made their business grow.
The offer of Estación Cereal (Photo: Courtesy)
But, the pandemic arrived and with it the closures not only of establishments, but also of borders between countries that particularly harmed Estación Cereal, since it depended on imported cereals.
For this reason, they had a double impact that they had to overcome: the difficulty in offering their products and the drop in customers. As a strategy to deal with fewer products that they could offer, they had to adjust to the inventories they had and offer according to their possibilities.
They were also forced to raise the prices of not-so-important products such as ice cream toppings, since the transportation costs of the few goods they could bring from the United States increased, in order to compensate for the lower sales of other cereals .
“This allowed us to show ourselves as a company that did not substantially affect its customers in terms of prices”, said Andrea.
To cope with the lower demand, they partnered with delivery platforms such as Rappi, Didi and also implemented their own delivery strategy with personalized products.
In turn, they sat down to negotiate with those who rent their premises and reached a good agreement that gave them oxygen to survive in the midst of the months of greatest confinement and then, with the reopening, they have continued with all the indications of the authorities in terms of capacity, hygiene measures, QR codes, and other measures.
Estación Cereal has based its success on the experience that they offer their clients with cereals that are not traditionally available in Mexico, which has led to a good part of their visitors being from the State of Mexico, for which reason "almost for It is a tourist activity for them to visit us”, says Andrea.
For them, the issue of capacity has been a challenge, because although they have halved the number of tables they offer and have shorter opening hours, they try to take care that the premises do not look so crowded , to provide a sense of security among its customers.
The experience of another entrepreneur: La Flor de Jamaica
Growing your business by focusing more on quality than quantity is the motto of La Flor de Jamaica, a business created by Fernando Dávila, a graduate engineer from the Tec de Monterrey.
His focus is to disseminate information about the spicy culture in Mexico, since chili has not been given its true value. “We have 146 types of chilies in the country, each one offers a different experience, and each one has a cultural, social, and economic value,” Fernando told Tec Review.
Fernando seeks to publicize the varieties of chili peppers in Mexico. (Photo: Courtesy)
He explains that you pay a lot of money for chili because it has a complex and refined culture, which is why he runs workshops so that Mexicans and foreigners get to know it better.
Fernando has a life principle that perfectly applies to his business: quality over quantity.
He comments that, instead of focusing –like any company– on growing, reaching more places, having more employees and having more customers, he bases his success on providing the best possible quality of his service and if he has to sacrifice the number of customers, it does.
“I prefer to have a single client who pays me what my product is really worth, than to have mass clients who do not pay enough and wear myself out more with them” explains Fernando.
He explains that he left the traditional method of entrepreneurship of seeking capital to launch the business, so he applied the Lean Startup philosophy.
This is based on the idea of "start with what you have", that is, if you are going to set up a taco shop, instead of looking for capital to buy the spinning top, stoves, chairs, premises, etc., it is better to start with the plastic chairs from the house itself and with the stove that they have and, little by little, they stock up on what they need, as the business progresses.
(Reporting by Laura Brugés, Jansel Jiménez and Luz Olivia Badillo)
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