Evaluating the feasibility of your new idea.
Before you invest too much time and money into a business idea, be sure to assess whether it’s viable. While there's no way to guarantee your idea will succeed, thorough market research can help indicate whether you can expect a return on investment of your time and energy. Ideally, your great idea will also cover your costs of doing business and generate a return for your hard work. It's important to be clear about how much money you'll need to make to pay your expenses, keep possible staff employed and provide you with an acceptable wage. Now's the time to sit down, crunch the numbers, assess the market and get a clear picture of your idea’s strength as a potential business.
Be sure there is demand for what you’re offering.
Potential demand is critical to whether your business will be feasible or not. Is there sufficient demand today? And if not, can you build demand over time?
Conduct some market research, either through online research or by setting up focus group with target customers.
Most industries have an industry association that produces research or can offer you some information or insights. Look at other towns and cities to determine if there is demand for similar products or services elsewhere.
Do you really have a market?
Do you know who will buy what you’re planning to offer? The success of your business could be decided by what motivates your target market to purchase your products and services.
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 by researching the overall market size. Search for US statistics for your industry.
Know your rivals.
The next step is to look at your likely 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. You can also check to see if they have social media profiles to find out how they conduct and market themselves online.
Does your product or service really fill a need that isn't met by the competition? If the answer is yes, it's again time to crunch some numbers to test if your idea is really viable.
Examine the numbers.
What will it take to get your business started and then keep it running? 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? Attempting to answer these questions now requires projecting some numbers, which should give you some estimates and a good sense of what it will take to make your business viable over time. Run a cash flow forecast to determine your start-up costs and calculate your break-even point to project the viability of your idea. Ultimately, your business should earn you more of a return than if you placed your original investment in a certificate of deposit.
Determine your price.
Get to know your market and what price customers might be prepared to pay for what you are offering. Take into account the cost of producing and supplying your goods or services, then choose a couple of price scenarios.
For example, if you are a café considering how much to charge for coffee, you might come up with three figures based on the market:
- $4.50 for a premium coffee with a higher profit margin
- $3.00 which is approximately the price of competitors in the local market
- $2.70 to undercut the market and hopefully gain more customers
The best price is generally a combination of customer expectations, your chosen position in the marketplace and your required margin to break-even. You may need to trial pricing options until you find what works for you.
It’s crucial for your business to have healthy cash flow. This helps ensure you’re able to meet operating costs – and prevent a money crunch at a crucial time. Here are some things to keep in mind that can help with cash flow:
You don't have to pay cash for everything your business needs to get up and running. Working capital is a critical ingredient for funding your business until it becomes profitable. Look at other ways you can finance capital, such as leasing.
Encouraging your customers to pay immediately, and in cash, is a useful approach. To encourage cash payments, you might be able to offer discounts for paying with cash, 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 on overdue debts quickly.
Have a chat with your bank manager or 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.
By doing some research to check the feasibility of your idea, it helps to ground it, give you realistic expectations and better ensure success. Crunching the numbers and assessing the market opportunity are good indications of the business potential behind your idea. But, keep in mind that new ideas might take some creative thinking to make them work. We recommend talking to other business owners, a small business specialist or a mentor to help get your idea off the ground.
- Read “Estimating start-up costs” for more information.
- Use our Break-even calculator to help crunch the numbers.
- Contact us to find out how we can help you take your idea to the next level.