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Evaluating Your Business Idea's Chances of Success

Filed under Evaluating Success. Fact checked on May 24, 2012.

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Before taking the plunge and starting a new business, you'll want to assess if there is a ready market for your product or service, and that your efforts will result in company profitability.

Once you've decided that you have the right stuff to be an entrepreneur, you're ready to determine if your business idea has the right stuff. Before you pump your life savings into a small business, you want to know if it has a chance to succeed.

Do a Market Assessment for Your Business Idea

One of the first steps in examining your business idea is to do some research to get to know more about your market. Presumably you already know that a market exists for your product. If you have an idea for a business but you're not sure whether a market for it exists or is big enough to support your business, you are getting ahead of yourself. If that description applies to you, you'll need to take a step back and look at finding the right small business for you.

For those who believe that a market exists, but who want to know more about the size and shape of the market in order to forecast their chances for success, research is the best place to start. Researching your market to know more about your customers and your competitors is a critical step for small business owners. If Procter & Gamble puts out a product that doesn't sell, they move on to the next idea. If you put out a product that doesn't sell, you're out of business.

These are some of the topics to research:

  • Who are your likely customers? Will who they are affect where you need to be (for example, if students are your customers, you may need to be near schools)?
  • How can you reach your customers? Which marketing options will reach the most customers at the lowest cost?
  • How much will they pay for your product or service? Are you planning to charge too much for your product or service? Are you planning to charge too little?
  • Who are your competitors? Have you also considered those who aren't direct competitors but who might nevertheless compete against you (for example, if you sell an online magazine, you're competing not just against other online magazines but against other products that occupy someone's leisure time)?
  • How will be you be positioned in the marketplace? Will you compete with existing businesses head on or will you try to find a special niche?

You also will want to analyze your competitors and develop competitive strategies for going head-to head with them. For most business owners, funding is not unlimited, so you'll want to conduct your market research on a tight budget to locate and target your potential customers. And, of course, you'll want to record all this information in the marketing section of your business plan.

Do Profitability Assessment of Your Business Idea

One of the most common reasons small businesses fail is that the owners underestimate how much money they will need to start the business. It always seems to cost more than they thought. Have you ever heard the old adage about planning a trip from the U.S. to Europe: Plan what you should wear and how much it will cost, then halve the clothes and double the money. Perhaps we need a similar adage about starting a small business.

Tools to Use

In the Business Tools area is a New Business Startup Checklist that contains everything you'll need to consider when figuring out how much money you'll need to start a new business.

The lesson to be learned from the many small business failures is that you need to be extremely careful when determining how much money you need to start your new business. Don't fall into the "rosy forecast" trap in which the new owner over-optimistically predicts robust sales in the first year and, as a result, doesn't have enough money on hand when the cash flow dries up.

Work Smart

When you estimate how much you'll need, either build in some cushion by padding the numbers or go back and change your estimates every time something costs more than you thought.

For example, a lot of small business owners who limit their advertising to the Yellow Pages will estimate their advertising costs as the cost of placing an ad. But when they actually take out the ad, they'll decide instead to place it under three categories rather than one.

Although the difference may only be $30 to $40 a month, the numbers really add up and the planning gets completely skewed when the owner decides to make similar changes in several different areas.

For a complete picture of how you can determine what it will cost you to start a new business, consider the following:

  • Making a family budget— a look at your family's fixed and variable living expenses. It's important to know the amount of personal costs that you'll have to cover during the startup phase of your business.
  • Costs of setting up the business— a look at the costs associated with forming the new business, including a complete rundown of everything you need to consider before you start your business.
  • Costs of running the business— a look at the costs associated with operating the business, including some advice on how to estimate how much you'll need to keep your business going.
  • Cash flow peaks and valleys— a look at the costs associated with uneven cash flows and seasonal businesses and how to plan for them.
  • Wearing the parachute— a look at some ways to limit your costs, and to cushion your fall if things don't go as well as expected.

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