when evaluating a company as a possible investment the investor should find out exactly how it makes its money this means looking through the company s business model fortunately it s not hard to find most companies outline their business model on their website and in their annual reports 
admittedly the business model may not tell you everything about a company s prospects investors need to fill in the blanks look beyond the sales pitch and recognize that sensitive information or any flouting of rules of ethics to gain an advantage won t be mentioned the investor who understands the business model even on a basic level can make better sense of the financial data evaluating successful business modelsa common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable counting costs up to the introduction of a product is not enough a company has to keep the business running until its revenues exceed its expenses one way analysts and investors evaluate the success of a business model is by looking at the company s gross profit gross profit is a company s total revenue minus the cost of goods sold cogs comparing a company s gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model gross profit alone can be misleading however analysts also want to see cash flow or net income that is gross profit minus operating expenses which is an indication of just how much real profit the business is generating the two primary levers of a company s business model are pricing and costs a company can raise prices and it can find inventory at reduced costs both actions increase gross profit many analysts consider gross profit to be more important in evaluating a business plan a good gross profit suggests a sound business plan in that case if expenses are out of control the management team could be at fault and the problems are correctable as this suggests many analysts believe that companies that run on the best business models can run themselves 