One of the most critical skills needed in starting and managing a business is the ability to distinguish between business activities and revenue generation. Many people assume that, since the primary purpose of a business is usually to make money, definition of the money-making operations is all that is needed to create a business plan. This false assumption can cause a lot of heartache when costly problems arise that could have been prevented with better planning.
Nearly any given method of profit is highly dependent on temporary market conditions, such as resource availability, consumer demand, and competition from other businesses. A pure revenue generation model tends to maximize gains by optimizing itself for the current market, making it extremely competitive and profitable for the short term but at the cost of inflexibility and possible insolvency when market conditions change. In short, revenue generation systems consume resources and labor in exchange for immediate profit, but if some of that profit isn’t reinvested back into developing other more permanent gains, nothing of lasting value is produced, and the business will fail when the market no longer needs the services it has optimized itself for.
A true business model, on the other hand, is purposefully designed to be a long-term structure for profitability that is capable of weathering significant market changes. Often they are also highly invested in short-term revenue generation activities, but the difference is that they do so through a careful management of assets and liabilities, making sure each activity builds up the core business structure and limits risk to an affordable level. One of the most famous examples of how this works in application is McDonald’s. While McDonald’s is known worldwide for its hamburgers, its core business is actually real estate. The corporation acquires and invests in high-value commercial property as a primary asset, and the selling of hamburgers is its system of revenue generation to fund its continued maintenance and growth. In the worst case scenario for the company, if the fast food market were to tank into complete disfavor, it might suffer a temporary setback from devalued food inventories but would still retain its primary asset of land value to fall back on to bring in emergency funds and begin a new revenue generation system to survive.
Profit Comes from the Right Balance of Both
Some form of income is a given necessity for running any business, so there’s nothing wrong with starting out primarily focused on revenue generation. The determinant factor is what you do with the revenue as it comes in. A fully functional business model allocates a significant portion of income to developing and maintaining assets, such as education, skill development, tangible property, and customer relations, and minimizing liabilities, such as by paying off debt, carrying insurance, and keeping up-to-date with pertinent laws and regulations. For a business to remain viable, it needs to account for the handling of all related assets and liabilities in figuring its operating costs as it grows and not just the amount of cashflow needed to support current revenue systems. Revenue systems are still of great importance to fund these investments, but no one particular system should have resources overcommitted to it that would make it too costly to change or replace if the market it depends on changes.
As a business grows and becomes more stable, it can afford to optimize more or even use temporary market conditions to convert surplus inventory or by-products into trendy, short shelf-life items to produce additional capital and customer goodwill without having to invest in long-term production. The key thing is to understand the difference between these two concepts to not make the mistake of overinvesting in a revenue system or underinvesting in a business.