The conceptual model of “Business Knowledge” can be described in a simple way (but not simplistic) by using the Gross Operating Margin (MOL) or the English acronym EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). In fact, at the base of a business development, the basic goal is to reach positive values of MOL (but not only, naturally…).
Business Knowledge Model: Gross Operating Margin Cycle
In general, to make a business means to economically transform “raw materials” (tangible or not tangible resources) into a product or services which can be sold at a price more high than costs we have spent to develop it. To do that, we need of “finances” (or “Business Fuel”), to be time-independent, with reference to economical events.
So, if we consider, in a first approximation, the following MOL expression:
- MOL: Gross Operating Margin
- R: Revenues (Turnover)
- CE: External Costs (Suppliers, raw materials, advices, etc.)
- CD: Production Direct Costs (Salaries, etc.)
- CI: Production Indirect Costs
- CR: Research & Development, Innovation Costs
- CG: General Costs
- CC: Business Costs
We can note that in the expression of MOL, there is the most of company processes, as:
- R-CE: difference between Revenues (invoices) and External Costs (raw materials, suppliers, advices, etc) or, in other words: Active/Passive Cycle (Cash-Flow). This difference refers also to Value Added developed in that business.
- CD+CI: sum of Direct Costs and Indirect Costs, they are related to how much we have spent to produce the product/service and so, to the labor cost.
- CR: this is related to the Research and Development costs that we need to put innovation and so, competitiveness in our product/service.
- CG+CC: sum of general and Overhead Costs, we need to develop our business.
So, in the short term (Fig.), when we start our business, usually we can expect a first negative start trend about MOL.
After a critical time (tc), with increasing of sales revenue (R), we have to transform MOL in a positive economic trend: MOL positive, it may be a short term (yearly) goal. We have however to take under control the financial situation, because in the short term we could always having to face a Cash-Flow misalignment caused by the difference between economical and financial period (invoicing and payments).
In the long term, we have to take under control not only MOL, but we have to make every effort to balance the economical and financial dynamics in terms of Costs/Revenues/Finances Control (Fig.).
Short/Long term Goal strategy
In reference to the Business Knowledge Model, in a first approximation, the basic parameters and indicators we need to do an Economic Evaluation of our Business are the following:
Revenue: R = P*(1- α) P: Price α: Scope for Negotiation
Value Added: VA = R – CE R: Revenue (Turnover) CE: External Costs CR: R&D Costs
Gross Margin: MI = VA – CD
Contribution Margin: MC = MI – CI – CC – CR (Gross Operating Income)
Gross Operating Margin: MOL = MC *(1- iB) iB: Bank Interest Income
Gross Profit: UL = MOL- QA – OF QA: Share of Depreciation OF: Borrowing Costs
Net Profit: UN = UL – FS FS: Tax Charges