Episode 2 of the Starting a Small Business short video series discusses the importance of conducting a Feasibility Study prior to committing resources. To view the Episode 2 video click http://youtu.be/ceY2Jb6Ps1E. The following information is taken directly from the book and is subject to copyright protection.
You have a business idea and it involves doing something that you really enjoy. It may have been a hobby in the past, but your hard work and savings over the years have put you in a position to go out on your own, trying something you really have fun with. Congratulations! You have just satisfied the first part of the equation in becoming a successful entrepreneur. How about the second part – making a profit? Oh – forgot about that one! Most fledgling entrepreneurs do forget about this part and they jump in with both feet. Some do stay afloat – but most don’t. Why? They didn’t conduct any pre-planning to determine if their new business can actually be profitable. Prior to spending any money on your new business, do yourself a big favor and conduct a feasibility study. The results of this exercise will provide you with enough information to make an informed decision about moving forward. The study involves two parts: a Market Attractiveness Study and a Financial Analysis.
Market Attractiveness Study
In business planning, nothing can be assumed. If the market is not attractive for a new player, then you will struggle and most likely fail. A Market Attractiveness Study is conducted by looking at several important factors that include the number of accessible customers, competition, and market growth.
- Potential Customers – Accessible Customers: How large is the market for your product or service and are the customers readily accessible? There should be enough customers available for you to obtain a market share that will sustain your business. Customer accessibility determines your cost to deliver the goods or services. Once you have an idea how large the market is, the number of people your company will be competing against must be determined.
- Competition: How many other businesses are providing the same product or service to the same market group? Of course, the smaller the number of players, the better it is for you. If you can take a totally unique idea to the market place, competition will not be a factor – at least in the early going.
- Market Growth: It may be something you always wanted to do, but if it is not an area of growth you will have a long uphill battle. Be sure to do your home work! Any business involving new technology, computer training and services for seniors are examples of growth markets. A special note here, if you are planning to start an Internet based business, the operating costs will be lower than a brick and mortar storefront. However, unless you are introducing something that no one else has thought of, the competition is likely to include thousands of other web enterprises. To succeed on the Internet you need a unique idea or delivery system. People generally purchase on-line because it is convenient and the price is lower.
These topics are covered in detail in the Marketing section of the book.
- Profit and Loss Projection: The most important tool in business for completing any kind of financial analysis is the spreadsheet. It is described in more detail in the Financial section. The P&L Projection, also known as an Income Statement, is a yearly projection covering the first three to five operating years. It will tell the new entrepreneur if the business can be profitable and the break-even point. Remember to be conservative with revenue figures and liberal with expenses to provide a cushion. A Cash Flow Projection for the same period should also be completed.
- Determining Start-Up Costs: There are substantial costs associated with starting a new business and they must be carefully researched and listed. These may include a facility and equipment, leasehold improvements, office furniture, supplies and equipment, computer hardware and software, initial cost of supply or inventory, vehicle, marketing collateral and advertising costs, professional fees, working capital and your own living expenses for three to six months of operation.
- Capital Availability: Once the complete list of start-up costs has been established, a determination can be made as to the amount of capital required to launch your new business. Subtract from this amount the money you can personally invest and you will know how much funding must be obtained from other sources such as loans and investors.
Profit & Loss, Cash Flow Projection and Start-Up Cost Analysis worksheets are available for download free from the companion web site: www.thesmallbusinessplanner.com. These handy templates are fully formatted and ready to use in Excel 97-2003 file format.
Making the Decision
Now that you have completed your Market Attractiveness survey and a comprehensive Financial Analysis, it is time to make a determination on moving forward with your business idea. Keeping in mind the critical factors of making a profit, being competitive and having enough money to do it right, you will be faced with one of three decisions. You can move forward comfortable that all indicators are good and start developing a more comprehensive business plan and marketing strategy. It is then safer to start making the increased investment required. However, if it does not appear that your business can be profitable and competitive, you can either abandon the idea entirely and save yourself from a large financial loss, or, re-work the venture until it looks feasible. A special note here on starting an Internet based business. Many people are under the false assumption that it is easier to become successful with a web based business because the expenses are lower than those of a typical brick and mortar establishment. This couldn’t be further from the truth. Sure, you won’t have the rent, but you will have competition, and lots of it. Just conduct a search for the key words that will be critical to people finding your product or service. There will likely be millions of sites returned and thousands of other similar on-line businesses pitching the same idea. Money can be made on the Internet, but only if you have a unique product, service or delivery system. Many people think they can develop a web site and the traffic will come flooding in and this just doesn’t happen. More on this topic in section 4.2 of the book which covers Developing Effective Web Sites. The Small Business Planner is available from your favorite bookstore or on-line. Go to, http://thesmallbusinessplanner.com/sbp.php for a list of retail sites.