Financial Models for Innovation

Introduction

Exploring financial models for the innovation needs to start as early as possible.

Ask this question:

What would be the best concept to make money or sustain this innovation over time?

Some principles and approaches

1. Reverse engineer the financial requirements of the business (predicting the future is not easy, especially with something that does not exist yet. Thus, rather than trying to predict how much revenue the business will generate, ask how much it has to generate to be viable. This will reduce the need for forecasting and help identify sensitivities and hypotheses you will need to test

2. Ditch the standard financial models and focus on basics (financial modelling should be developed through iterations and not based on pro-forma templates. Start with the bare essentials.)

3. Understand economics first (focus on the basics including understanding the cost (fixed and variable) to produce the innovation, revenue to be earned, how volume will impact this, ie how many units do you need to sell to break even?)

4. Develop multiple revenue streams (need to explore each and every way that your offering or business can make money, eg an innovation in the health care industry would consider different stakeholders like patients, health workers (doctors, specialists, nurses, etc), clinics, hospitals, suppliers, government health-related departments, etc. These additional options can create a pathway for future growth.)

5. Cash conversion is critical (as cash is needed for working capital, you need to know how much you require and how quickly. The shorter the development cycle, the less cash you will need to grow your business.)

 

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