Check that your business idea will work

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Although the only real way to find out if your business idea will work is to actually start your business, there are a number of things you can do to help research your business idea before you take the leap.

Working through this process methodically will give you a better sense of your businesses chance of success .

Reality Check 1

Have a key competitive advantage

Your business ideally needs to stand out from the competition. If your business has a unique selling point (USP) or competitive advantage, it will give customers a reason to go to you, rather than anyone else. Businesses which do not have a clear and strong USP, often have to resort to competing on price. This typically means lower profit margins.

Consider basing your competitive advantage on something the customer values. For example:

• First to the market and no one else sells what you do.
• Being the most reliable with the best guarantee.
• Having exclusive products or a contract so you are the only supplier.
• You have the best quality or longest warranty.
• Having a cost advantage so you can be the cheapest yet still make a profit.
• Being the healthiest or most sustainable.
• Knowing more than anyone else and being an expert
• Being made in Hawaii.
• Organic or use recycled materials.

 

Reality Check 2

Research your target market

It makes sense to ask the people you’re likely to be selling to, what they think of your business idea. Try and find out:

• Whether people actually want what you’re selling.
• Which people or businesses are most likely to buy.
• Which group of customers are likely to be the most profitable.
• What prices you could charge for your products or services.
• How often people will buy.
• The benefits that people want to receive when they buy your type of product.
• What needs people have which are currently not being met by any other businesses.
• The best ways to market to potential customers.
• Where people currently buy from and why they choose to support those businesses.

Much of this information can also be used to determine whether there will be sufficient demand for your business’s products and services for your business idea to work. It can also be used to figure out how you can modify your original idea so it will be viable, perhaps by identifying ‘gaps’ in the market.

Test the market

Trial marketing can be one of the most reliable ways to test your market potential. If you are introducing a new product or service, you could:

• Set up the business part-time while still working.
• Test the response by selling at trade fairs, weekend markets or short-term contracts, depending on the type of business you’re running.
• Launch a limited marketing campaign in a selected town or area.

 

Reality Check 3

Make sure your business model will work

It’s relatively simple to determine whether you can sell enough to make a profit, but can you physically make enough?

For example selling a product which takes four hours to build, means you have a capacity of two a day (around ten a week or five hundred a year). Is this enough to make a profit from the price you’re selling them for? If you’re a retailer then calculate how many people you need per day spending the average amount for a customer in your type of business. Is the business viable?

Conduct a break-even analysis to show the minimum amount of sales that your business needs to make in order to cover all of your costs. Then work it out again, this time with your profit margin added in. If you can make at least this amount of sales, the idea may be financially feasible (assuming you can still get customers of course).

Reality Check 4

Do you have the money

Calculate how much money you need, and how much money you have. If there is a gap then you’ll need to cover this amount somehow. It's common for some business owners to underestimate the actual amount of money needed to start up a new business venture.

Step 1

Add up all the purchases you’ll have to make to get your business up and running. Some of these costs could include:

• Vehicles, plant equipment and machinery.
• Office equipment, computers, scanners, desks.
• Initial inventory or raw materials.
• Fees for licenses or permits.
• Any staff you need in advance before the doors open.
• Your own salary (if you intend to take one).
• Internet, online, website build.
• Product or service development.

Step 2

Once you’ve determined all your set-up costs calculate your ‘working capital’, which is how much you’ll think you need to cover all your running costs until you start to make a profit.

Examples of these on-going costs include:

• Rent, power, internet.
• Accounting fees, insurance, bank fees.
• Salaries or wages, any sub-contractor costs.
• Online subscription fees, communications.
• Anything that is a regular cost regardless of sales.

For example if these costs totalled $20,000 a month, and you’ll think you need at least 6 months until the business can pay its own way, then you’d need $120,000 in working capital.

Step 3

Add the set-up costs to your working capital costs to get a final start-up estimate.

Do you have enough money saved, borrowed or accessed from somewhere to cover this amount?

Summary

Your business is much more likely to succeed if you can pass these initial four reality checks. Sure, there are still hurdles to cross, such as accurate pricing, finding a location, being able to find customers and building a sustainable revenue stream.

Next steps

• Allow some time after you have collected all your research. Ask yourself if you want to proceed.
• Talk to a business advisor or another small business owner about your idea, and collect as much feedback as you can. Though the final decision is yours.
• If your information points to a viable business, you feel confident in your entrepreneurial abilities, and you want to move ahead, then your next step is to write up a proper business plan.