Can You Make Money With Your Business Idea
Perhaps the most crucial problem you will face after expressing
an interest in starting a new business or capitalizing on an apparent
opportunity in your existing business will be determining the feasibility of
your idea. Getting into the right business at the right time is simple advice,
but advice that is extremely difficult to implement. The high failure rate of
new businesses and products indicates that very few ideas result in successful
business ventures, even when introduced by well established firm. Too many
entrepreneurs strike out on a business venture so convinced of its merits that
they fail to thoroughly evaluate its potential.
This checklist should be useful to you in evaluating a business
idea. It is designed to help you screen out ideas that are likely to fail before
you invest extensive time, money, and effort in them.
Preliminary Analysis
A feasibility study involves gathering, analysing and evaluating information
with the purpose of answering the question: "Should I go into this
business?" Answering this question involves first a preliminary assessment
of both personal and project considerations.
General Personal Considerations
Are your
personality characteristics such that you can both adapt to and enjoy business
ownership/management?
- Do you like to make your own decisions?
- Do you enjoy competition?
- Do you have will power and self-discipline?
- Do you plan ahead?
- Do you get things done on time?
- Can you take advise from others?
- Are you adaptable to changing conditions?
The next series of questions stress the physical, emotional, and financial
strains of a new business.
- Do you understand that owning your own business may entail working 12 to
16 hours a day, probably six days a week, and maybe on holidays?
- Do you have the physical stamina to handle a business?
- Do you have the emotional strength to withstand the strain?
- Are you prepared to lower your standard of living for several months or
years?
- Are you prepared to loose your savings?
Specific Personal Considerations
- Do you know which skills and areas of expertise are critical to the
success of your project?
- Do you have these skills?
- Does your idea effectively utilize your own skills and abilities?
- Can you find personnel that have the expertise you lack?
- Do you know why you are considering this project?
- Will your project effectively meet your career aspirations
The next three questions emphasize the point that very few people can claim
expertise in all phases of a feasibility study. You should realize your personal
limitations and seek appropriate assistance where necessary (i.e. marketing,
legal, financial).
- Do you have the ability to perform the feasibility study?
- Do you have the time to perform the feasibility study?
- Do you have the money to pay for the feasibility study done?
General Project Description
- Briefly describe the business you want to enter.
- List the products and/or services you want to sell
- Describe who will use your products/services
- Why would someone buy your product/service?
- What kind of location do you need in terms of type of neighbourhood,
traffic count, nearby firms, etc.?
- List your product/services suppliers.
- List your major competitors - those who sell or provide like
products/services.
- List the labour and staff you require to provide your products/services. _
Requirements For Success
To determine whether your idea meets the basic requirements for a successful new
project, you must be able to answer at least one of the following questions with
a "yes".
- Does the product/service/business serve a presently unserved need?
- Does the product/service/business serve an existing market in which demand
exceeds supply?
- Can the product/service/business successfully compete with an existing
competition because of an "advantageous situation," such as better
price, location, etc.?
Major Flaws
A "Yes" response to questions such as the following would indicate
that the idea has little chance for success.
- Are there any causes (i.e., restrictions, monopolies, shortages) that make
any of the required factors of production unavailable (i.e., unreasonable
cost, scare skills, energy, material, equipment, processes, technology, or
personnel)?
- Are capital requirements for entry or continuing operations excessive?
- Is adequate financing hard to obtain?
- Are there potential detrimental environmental effects?
- Are there factors that prevent effective marketing?
Desired Income
The following questions should remind you that you must seek both a return on
your investment in your own business as well as a reasonable salary for the time
you spend in operating that business.
- How much income do you desire?
- Are you prepared to earn less income in the first 1-3 years?
- What minimum income do you require?
- What financial investment will be required for your business?
- How much could you earn by investing this money?
- How much could you earn by working for someone else?
- Add the amounts in 5 and 6. If this income is greater that what you can
realistically expect from your business, are you prepared to forego this
additional income just to be your own boss with the only prospects of more
substantial profit/income in future years?
- What is the average return on investment for a business of your type?
Preliminary Income Statement
Besides return on investment, you need to know the income and expenses for your
business. You show profit or loss and derive operating ratios on the income
statement. Dollars are the (actual, estimated, or industry average) amounts for
income and expense categories. Operating ratios are expressed as percentages of
net sales and show relationships of expenses and net sales.
For instance 50,000 in net sales equals 100% of sales income (revenue). Net
profit after taxes equals 3.14% of net sales. The hypothetical "X"
industry average after tax net profit might be 5% in a given year for firms with
50,000 in net sales. First you estimate or forecast income (revenue) and expense
dollars and ratios for your business. Then compare your estimated or actual
performance with your industry average. Analyse differences to see why you are
doing better or worse than the competition or why your venture does or doesn't
look like it will float.
These basic financial statistics are generally available for most businesses
from trade and industry associations, government agencies, universities and
private companies and banks.
Forecast your own income statement. Do not be influenced by industry figures.
Your estimates must be as accurate as possible or else you will have a false
impression.
- What is the normal mark-up in this line of business. i.e., the dollar
difference between the cost of goods sold and sales, expressed as a
percentage of sales?
- What is the average cost of goods sold percentage of sales?
- What is the average inventory turnover, i.e., the number of times the
average inventory is sold each year?
- What is the average gross profit as a percentage of sales?
- What are the average expenses as a percentage of sales?
- What is the average net profit as a percent of sales?
- Take the preceding figures and work backwards using a standard income
statement format and determine the level of sales necessary to support your
desired income level. From an objective, practical standpoint, is this level
of sales, expenses and profit attainable?
MY BUSINESS, Pty Ltd.
Condensed Hypothetical Income
Statement For year ending June 31
Item Amount Percent
Gross sales 773,888
Less returns, allowances,
and cash discounts 14,872
________
Net sales 759,016 100.00
Cost of goods sold 589,392 77.65
________ ________
Gross profit on sales 169,624 22.35
Selling expenses 41,916 5.52
Administrative expenses 28,010 3.69
General expenses 50,030 6.59
Financial expenses 5,248 0.69
________ ________
Total expenses 125,204 16.50
Operating profit 44,220 5.85
Extraordinary expenses 1,200 0.16
________ ________
Net profit before taxes 43,220 5.69
taxes 19,542 2.57
________ ________
Net profit after taxes 23,678 3.12
Market Analysis
The primary objective of a market analysis is to arrive at a realistic
projection of sales. after answering the following questions you will be in a
better positions to answer question eight immediately above.
Population
- Define the geographical areas from which you can realistically expect to
draw customers.
- What is the population of these areas?
- What do you know about the population growth trend in these areas?
- What is the average family size?
- What is the age distribution?
- What is the per capita income?
- What are the consumers' attitudes toward business like yours?
- What do you know about consumer shopping and spending patterns relative to
your type of business?
- Is the price of your product/service especially important to your target
market?
- Can you appeal to the entire market?
- If you appeal to only a market segment, is it large enough to be
profitable?
Competition
- Who are your major competitors?
- What are the major strengths of each?
- What are the major weaknesses of each?
- Are you familiar with the following factors concerning your competitors:
- Price structure?
- Product lines (quality, breadth, width)?
- Location?
- Promotional activities?
- Sources of supply?
- Image from a consumer's viewpoint?
- Do you know of any new competitors?
- Do you know of any competitor's plans for expansion?
- Have any firms of your type gone out of business lately?
- If so, why?
- Do you know the sales and market share of each competitor?
- Do you know whether the sales and market share of each competitor are
increasing, decreasing, or stable?
- Do you know the profit levels of each competitor?
- Are your competitors' profits increasing, decreasing, or stable?
- Can you compete with your competition?
Sales
- Determine the total sales volume in your market area.
- How accurate do you think your forecast of total sales is?
- Did you base your forecast on concrete data?
- Is the estimated sales figure "normal" for your market area?
- Is the sales per square foot for your competitors above the normal
average?
- Are there conditions, or trends, that could change your forecast of total
sales?
- Do you expect to carry items in inventory from season to season, or do you
plan to mark down products occasionally to eliminate inventories? If you do
not carry over inventory, have you adequately considered the effect of
mark-down in your pricing? (Your gross profits margin may be too low.)
- How do you plan to advertise and promote your product/service/business?
- Forecast the share of the total market that you can realistically expect -
as a dollar amount and as a percentage of your market.
- Are you sure that you can create enough competitive advantages to achieve
the market share in your forecast of the previous question?
- Is your forecast of dollar sales greater than the sales amount needed to
guarantee your desired or minimum income?
- Have you been optimistic or pessimistic in your forecast of sales?
- Do you need to hire an expert to refine the sales forecast?
- Are you willing to hire an expert to refine the sales forecast?
Supply
- Can you make a list of every item of inventory and operating supplies
needed?
- Do you know the quantity, quality, technical specifications, and price
ranges desired?
- Do you know the name and location of each potential source of supply?
- Do you know the price ranges available for each product from each
supplier?
- Do you know about the delivery schedules for each supplier?
- Do you know the sales terms of each supplier?
- Do you know the credit terms of each supplier?
- Do you know the financial condition of each supplier?
- Is there a risk of shortage for any critical materials or merchandise?
- Are you aware of which supplies have an advantage relative to
transportation costs?
- Will the price available allow you to achieve an adequate mark-up?
- Can you obtain the additional data needed?
- Are you aware that there is less than a 50-50 chance that you will be in
business two years from now?
has been designed to help you keep track
of the cents so the dollars will look after themselves.
Just one of the ways to help you make and keep your money...