The big idea
Creating and analysing your financial model is a fundamental part of understanding how your business works. It describes how you produce and deliver your activities, services or products and the income you generate as a result. It is one aspect of the multiple views needed to understand the drivers and underlying assumptions of your business. In creative and cultural enterprises, money is often only regarded as an input. It is not also seen as an output that leads to further investment in activity. This tool encourages you to consider both aspects.
The purpose of this tool is to help you explore your financial model and analyse what that
means for how your business develops. It looks at both income flow and your cost structure. Cost structures have two basic characteristics:
- Fixed costs: costs that remain the same regardless of the volume of activity (in the short term, usually one year); they tend to include buildings, salaries and equipment. Fixed costs increase in steps as the scale of the business changes
- Variable costs: those elements that vary in line with the volume of activity, such as programming, education work, batch production etc
Revenue streams derive from all the activities the business undertakes. In the creative and cultural industries, these can range from tickets sales or jewellery commissions to consultancy contracts and room hire. Defining your financial model should help you understand what financial risks you are taking and how likely they are to materialise.
The tool consists of two elements. The first part is about analysing how your organisation is structured with regard to its fixed and variable costs. The second aspect encourages you to think about what that model means in relation to your levels of risk.