It is often difficult to figure out how to research your idea, especially if you have never been in business for yourself. You will need decide if your idea has profit potential.
Use the following twenty steps as a guide to help you determine if your idea is worthwhile.
- 01. Create a profile of your paying customer.
- Your customers might be consumers or retail stores, wholesalers or manufacturers, government or other institutions. List as many points as you can about who you think will buy your product. If you are selling to a consumer market, try collecting magazine pictures of what you think your customer looks like. List their age, gender, marital status and income and try to describe their lifestyle.
If you expect to sell to another business or organization, estimate what industries they are in, what kind of company, how long they have been in business, how many employees, their annual sales, what department would be interested in your offer, who their customers are and anything else you can identify.
- 02. List and describe the features of your product or service.
- State how these features will benefit your customer. Define the features of your idea and determine what these features do for your customer. You will create a list of the selling points that you can use in your advertising, your brochures, and in your sales presentation. This will help you establish why your customer might buy your product or service.
- 03. Define the main geographic area you intend to sell to during your first year.
- Are selling to your neighborhood, your community, Jamaica, Region, The United States? By defining where you are going to sell in your first year you immediately put yourself in focus. You will likely be able to figure out how many potential customers are located in this area. If you are selling to a large geographic area, you will probably need a good deal of money, marketing and resources. Defining this area makes it much easier to figure out what your needs are going to be.
- 04. What competitors are selling to this geographic area?
- Once you determine who and where your customers are, you must determine whom you have to share them with. Find out if similar products are carried in retail outlets, similar companies advertise in the yellow pages or are listed in industry directories.
- 05. What price do these competitors charge?
- Establish what your competitors charge and list the selling points of their product or service. Try to find your industry's wholesale and retail prices.
- 06. Estimate what price you can charge, yet still remain competitive.
- Determining how competitive you can be is a big step toward how feasible your idea is. If your product is superior to your competition and your market is not very price sensitive then you may be able to charge considerably more than your competition. If you are selling to retailers or wholesalers, you will have to leave enough room for others to mark your products up.
- 07. Why would your customers buy from you instead of your competition?
- What is unique about your offer that would benefit your customer? There may be something about your product, your price, the friendliness and speed of your service, your hours of operation, your level of quality, the skills of your employees or other aspects of your business.
- 08. List and briefly describe trends in your market or industry.
- Knowing trends in your market or industry will help you determine where it's going and how your business can take advantage. Check business and industry/trade magazines for recent articles. Some libraries have a "business periodicals index" to help you find these articles.
- 09. What is the growth potential of the market?
- Is your industry or market growing or declining? Are trends or fads new, peaking or declining? Generally, you will be more successful being part of a growing market. Check business and industry/trade magazines for recent articles.
- 10. How are you going to let your customer know you exist?
- So now you know who your customer is, where they are and why they will buy your product. How are you going to communicate your offer to them? Will you rely on having a good location? Will you use advertising? Sales calls? Direct marketing? Yellow pages? You may find it helpful to examine the Business Promotion Idea List within Session 2 of this Workshop.
- 11. Estimate Sales for the first year.
- Base your estimates on the size of your market, level of competition, your price, your plans for promotion and trends in your industry. Create a pessimistic, an optimistic, and a middle of the road forecast.
- 12. List any government approvals necessary to launch your idea.
- There may be some extensive or expensive regulations involved with your type of business. The Information Sources from Business Center Directory can assist you with determining provincial regulations affecting your business.
- 13. Briefly describe your manufacturing or purchasing process.
- State how you will make or acquire the goods you plan to sell. Use your sales forecast to help you plan this part of your operation. Think about potential growth in future years.
- 14. Briefly describe your fulfillment process.
- How does your customer get their order and how do you get paid.
- 15. Estimate the capacity of your operation in the first year.
- How big will your operation be? What is the limit of what you can produce, stock, service and sell? Can you meet your sales forecasts? Have you taken future growth into consideration?
- 16. Make a list your potential suppliers
- Your concept may rely heavily on the reliability of your raw material suppliers and/or your subcontractors. How dependent will you be? Figure out who your suppliers will likely be and try to find back-up suppliers.
- 17. Make a list of the resources you will require to start your business.
- List the employees, floor space, leasehold improvements, equipment, vehicles, inventory, supplies and services you will require to open your business. Estimate the costs of each item on your list. You will need this list to determine your start up costs.
- 18. Determine what resources you will finance, lease or rent.
- You will probably not pay for large purchases outright but will instead lease, rent or finance these items. You will need to estimate your monthly payments to help you prepare a cash flow worksheet.
- 19. List your financial strengths and weaknesses.
- How much of your own money do you have for this business? What assets can you use as collateral to secure a loan? Do you already own the vehicles, computer equipment or tools needed to start your business? Do you have family, friends or others who are prepared to invest in your business? Do you have a strong personal credit rating?
Evaluate your chance for success
Before you pump your life savings into a small business, you want to know if it has a chance to succeed.
Here's a look at the prime considerations for determining if your business idea has a chance to succeed:
- Market assessment
Is there a market for your product or service? If so, how much income can you expect to derive from it?
- Profitability assessment
How much will starting a new business cost you?
Can you afford a lengthy "red ink" period following startup, as well as periodic lulls in cash flow?
Can you afford to fail?
- Financing assessment
Will you be able to obtain the necessary financing for your business?
If so, from where?
- Legal assessment
What potential legal liabilities are you exposing yourself to by starting a new business?
Are the costs of protecting yourself worth the trouble?
- Researching your industry
How can you learn more about your chosen industry and about the resources that are available to help you?
- Forecasting sales
A look at how to determine how much you can expect to earn; obviously, the more you earn, the less you'll have to pay out of your pocket to keep the business going
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.
When you conduct research, you'll want to find out the following:
- 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?
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.
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.
What will it cost you to run your new business?
Here's what you need to consider when you're figuring out how much it will cost you to keep the business afloat:
The first three months
A look at the business costs you can expect to incur in those first three months
A lot of new business owners who plan their cash flow needs consider only the cash flow needs up to the day they open for business. They forget to consider their cash flow needs after they are in operation. Having enough cash for the first few months of the new business is just as important as having enough start-up cash.
A good rule of thumb is to have access to enough working capital to pay all of your bills, except inventory purchases, for the first three months of operations. Inventory purchases will follow the special rules noted below. This working capital will enable the new business to have the needed flexibility the first 90 days.
The reason for the 90 days of working capital is to make up for any mistakes you made when making your cash forecasts. If sales are slow or you run into unexpected startup expenses, this working capital will get you through the slow times.
When starting a new business, the amount needed to keep the business running, called working capital, will vary by type of business. If your new business is a one-employee consulting firm, you will have a much smaller working capital requirement than a retail establishment that has a large inventory.