It’s natural to be excited and confident about your prospects for business success – but to be sure your idea is feasible, you’ll need enough demand to make a profit.
Testing the feasibility of your business idea
There's no way to be certain your idea will become successful. However, conducting thorough market research will help ensure you’re investing your time and effort in a venture that should offer a favourable return.
Will your idea make money?
It’s important to be clear about how much money you’ll need to make to pay your expenses, keep your staff employed, and maintain a liveable wage. Sit down and work out the minimum amount of money your business will need to make to survive.
In order to give your business the best chance of reaching this figure, you’ll need to take into account:
- Your business’s break-even point – the balancing point between making a loss or a profit.
- The size of your target market – is it large enough for you to generate sufficient sales?
- The strength of your competitors – do they have the ability to price you out of the market?
- Your competitive advantages – that put your business in a superior position relative to your competitors.
Assess demand for your offerings
Potential demand is critical to whether your business will be feasible or not. Is there sufficient demand to make a living? And if not, can you build demand over time?
Think about conducting some market research.
Most industries have an industry association that produces research or can offer you some information or insights. Look at other towns – is there demand for similar products or services elsewhere?
Do you have a market?
Do you know who’ll buy your products or services? The success of your business could be decided by what motivates your target market to purchase your offerings.
You’ll need to ensure your products or services appeal to your target market segment. You’ll also need to find out how large your potential market is.
Study your rivals
The next step is to look at your probable competitors. Find out what their respective competitive advantages are, and examine their pricing and marketing strategies.
Looking at their websites and printed advertising material is a good start. Check to see if they have social media profiles to find out how they conduct themselves online.
Does your product or service really fill a need that isn’t met by the competition? If you're answering yes, it's time to crunch some numbers to test if your idea is really viable.
Figure out your forecasts
Work out a cash flow forecast using your anticipated costs, selling prices and sales quantities. How long will it take to build up your sales to a point where your business is able to break even and make a profit?
There's little point in investing a lot of money, time and effort into running a business if you earn less than the returns you'd get from putting your money into a term deposit.
Determine your start up costs
Will you have sufficient funds to meet your start up costs until your business begins to turn a profit?
Use an excel template to do a cash flow forecast. Start by estimating all your cash outflows then list your expected incomings for the period ahead.
If you're satisfied that your business idea can bring in a good return once it’s established, chances are you’ll have a viable business idea. But before you go charging ahead with entrepreneurial enthusiasm and set up your business, it makes senses to calculate your break-even point.
Calculating your break-even point is a vital step in early business planning. Are your sales targets realistic and will you be able to cover all your operating costs?
To work out your break-even point, first work out your fixed and variable costs.
These costs are not dependent on the level of goods or services produced by your business. They can include rent, rates, power, phone, interest on debt, insurance, repairs and maintenance, stationary, and wages of permanent staff.
Variable costs are dependent on the level of products or services produced by your business. They fluctuate in proportion to your level of sales. They can typically include supplies, freight, and wages of temporary staff.
Get to know your market and what price customers might be prepared to pay for your offerings. Take into account the cost of producing and supplying your goods or services – then choose a couple of price scenarios. They could be prices that are ambitious, cautious and most likely.
Your business will reach its break-even point when total costs are equal to total sales. If sales continue to climb, you’ll begin to make a profit. The feasibility of your business idea will depend heavily on being able to break even.
Lowering your need for funding
You don’t have to pay cash for everything your business needs to get up and running – after all, working capital is a critical ingredient for funding your business until it becomes profitable.
Ideally you want to improve your cash flow – encouraging your customers to pay immediately, and in cash, is the best-case scenario. Maybe there are some ways you can achieve this, like cash discounts or prompt payment discounts.
Avoid allowing new customers to extend their credit terms. Make sure you check their references and have systems in place to follow up overdue debts quickly.
Have a chat to your accountant to be sure your loan portfolio is balanced. Assets with a short lifespan should be financed by short-term loans, while those with a longer life need long term finance.