The only way to truly find out if your business idea will work is to actually start your business, but there are a number of things you can do to research your start-up idea before you take the leap.
Working through this process methodically will give you a better sense of your business's chance of success.
Reality Check 1. What is your key competitive advantage?
Ideally, your business needs to stand out from the competition. If your business has a unique selling point (USP), also known as a value proposition or competitive advantage, it will give customers a reason to come to you rather than anyone else. Businesses without a clear and strong USP often have to resort to competing on price, which typically means lower profit margins.
Your competitive advantage should be based on something the customer or market values. For example:
- Being first to the market
- Being the most reliable or having the best guarantee
- Having exclusive products or being the only supplier
- Having the best quality or longest warranty
- Having a cost advantage that still enables you to make a profit
- Being the healthiest or most sustainable
- Being an expert in your field
- Being locally made
- Being organic or using recycled materials
Reality Check 2. Who is your target market?
It makes sense to ask potential customers what they think of your business idea. Try and find out:
- Whether people 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 price customers are willing to pay for your products or services
- How often customers will buy
- What benefits customers expect when buying your product
- What needs people have that are not being met by any other business or product
- How to best market to potential customers
- Where people currently buy and why they choose to support those businesses
Much of this information can also be used to determine whether there will be enough demand for your business’s products and services to make your idea work. This information can be used to figure out if your idea is viable, identify "gaps" in the market, and determine how you can modify your original idea if necessary.
PRO TIP: 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. Is your business model viable?
It’s relatively simple to determine whether you can sell enough product to make a profit, but can you physically make enough product?
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 at your price point? If you’re a retailer, calculate how many customers you need per day to spend the average amount for a customer in your line of business. Can you attract enough customers to make your business viable?
Conduct a break-even analysis to show the minimum amount of sales your business needs in order to cover your costs. Then work it out again with your profit margin added in. If you can make at least this number of sales, the idea may be financially feasible (assuming you can actually 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, you’ll need to cover this amount somehow. It’s common for some business owners to underestimate the amount of money truly needed to start a new business venture.
Add up all the purchases you’ll have to make to get your business up and running. Some of these costs could include:
- Vehicles, equipment, and machinery
- Office equipment, computers, scanners, and desks
- Initial inventory or raw materials
- Fees for licenses or permits
- Any staff you need before the doors open
- Your own salary (if you intend to take one)
- Website development
- Product or service development
Once you’ve determined your set-up costs, calculate your "working capital," which is how much you need to cover your recurring costs until you make a profit.
Examples of these ongoing costs include:
- Rent, utilities, and internet
- Accounting fees, insurance, and bank fees
- Salaries or wages and any sub-contractor cost
- Online subscription fees and communications
- Any regular cost regardless of sales
For example, if these costs total $20,000 a month, and you think you need at least 6 months until the business can pay its own way, then you’d need $120,000 in working capital.
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 otherwise available to cover this amount?
Sure, there are still hurdles to cross, such a finding a location, attracting customers, and building a sustainable revenue stream. However, your business is much more likely to succeed if you can pass these four reality checks.
When it's time to finance your business idea, consider looking into a Business Loan or Line of Credit with Bank Independent. Request a call or visit from your local Sales Officer by visiting one of our 28 convenient locations