What to Consider Before Investing Your Time, Energy, and Capital in a Small Business
The statistics are sad but true: 80% of small businesses fail within the first five years. Despite the common misperception that most businesses fail due to lack of capital, most problems generate from poor planning – either related to operations, marketing and/or finances. The strategy you outline for your business before you start will play a large part in the ultimate success of your company.
An in-depth business plan, including an operations plan, a marketing plan, and complete financial forecasts, is the ideal way to make sure all bases are covered before starting your venture. However, a feasibility study can be an easy, relatively inexpensive and fast way, to at least ensure that your business idea is viable enough to take the next step. The ultimate objective of a feasibility study is to determine whether or not your business idea has the potential for success. Namely, if there is enough of a market for your product or service to meet your financial goals. Conducting a feasibility study will either give you the confidence to move forward with the idea, or it will save you a lot of money, time, and stress by realizing early on that this business is currently not the best fit for you.
While there are many different aspects of your venture to research and consider, the following items are a solid step in the right direction to determining the feasibility of your business.
Market research / demographic information
All of the start-up capital in the world is not going to guarantee business success if a market does not exist for your product or service. How do you know for sure if there is a market? Simply ask. Talk to some potential customers to get their reactions to your product or service. Is this something they would use? How often? You might also obtain valuable information on how much customers would be willing to pay for your offering. Individuals are generally more open to these types of questions as part of a market research study, versus being propositioned for business. When you are ready to develop an in-depth marketing plan, consider conducting a full survey, to really pinpoint your target market. For the scope of a feasibility study though, you simply want to ensure that there is a market at all.
First think about who your target market is. Will you sell to other small businesses? To public agencies? To the general public? Try to be as specific as possible. Then determine how to reach potential customers in your target market. For example, if you want to open a childcare center and need to ensure enough of a market demand in your area, you would talk to parents within the community. Think about where these parents would be. Most likely, a visit to your local park, elementary school, or children’s store would be fruitful. You could also contact local agencies that deal with childcare licenses, such as the Community Childcare Council, to obtain information regarding the demand they have observed in your geographic area.
Next, look at how many competitors serve your target market, and if possible, find out their level of success. Look at how they market themselves, how long they have been in business, what they charge for their products or services, how they position themselves in the marketplace, and if possible, what their annual revenues are. Not only will you get a sense of whether or not the market is large enough to accommodate another similar business, but you will also get ideas on how to position your own business in relation to the competition. For example, perhaps you will offer outstanding customer service – something you noticed your competitors lack. Or perhaps you will find a niche that is not yet being served. The bottom line is that you need to give customers a reason to buy from you versus the competition. If you can differentiate yourself enough from competitors, than you may find that, even in a saturated market, you can make your business a success by offering a better product or service or offer a greater value. Having the information necessary to set your business apart from the competition, prior to starting your business, will allow you to start in the right direction.
Often, talking to a competitor who is outside of your area (a business owner is more likely to be forthcoming if they do not feel threatened by potential competition) can be very helpful to get ideas for forecasting potential revenues, marketing ideas, etc.
Geographic Information
Next, think about where you will operate the business. For a small service-based business, it may make more sense to start the business from home until you are established and have built up a steady revenue stream. However, if you often see clients, or need a store front, look at locations that would make sense for your business. The majority of the time – especially for small businesses – it makes more sense to rent versus buy a location, especially while you are in the initial start-up phase. When looking at possible locations, keep in mind rental costs, visibility to cars and pedestrians, parking availability, proximity of competitors, and room for expansion. Also consider what other businesses surround the site. Are there popular stores or restaurants that already bring a lot of customers to the area? Or, are there synergistic establishments? For example, a massage therapist might want to set up shop in the vicinity of a chiropractor and eventually develop a relationship of referring clients to each other.
Operations
An operations plan consists of all the details surrounding the actual conducting of the business. In a business plan one would provide extensive growth and expansion strategies as well as plans for specific facilities, equipment, and processes. For the scope of the feasibility study, take a preliminary look at what the overall process would look like, from start to finish. For example, imagine a customer finding your product or service. How will you make the product, or deliver the service? Where will you buy raw materials? How will you control inventory? What will be the customer’s expectations?
Also consider risks. Remember, this is not a business plan to obtain venture capital or a small business loan – this is entirely for your benefit so you can make the most educated decisions surrounding starting and operating your small business. Therefore, be completely honest with yourself – especially surrounding risks. There is no need to dwell on the risks that every business faces – a depressed economy, natural disasters, or theft. Instead, focus your attention on some risks that may be unique to your business, such as a limited target market or the threat of a large chain store moving into your territory. After you have brainstormed some possible risks, develop a contingency plan for how you would deal with each. If you encounter a risk for which no contingency plan is likely to save your business, determine the probability of this risk happening. Ultimately you will have to come to a decision whether it is still worth it for you to start the business, given this possible risk. However, if you do start your venture, you will be more confident in your likelihood of success, already having contingency plans prepared for possible risks.
Financial Viability
Determining the financial viability of a business can be the most daunting task for many small business owners. However, this does not have to be complicated and the benefits of this planning far outweigh any inconveniences. Sometimes, it can be easier to work backwards, and first think about how much you need to draw from your business per month to support yourself and your family. Look at your monthly household expenses, subtract any other income (from a spouse’s earnings, investments, etc.) and what you are left with is the minimum you need to earn from your business. Again, you are looking at the feasibility of the business, not measuring the potential success. You probably have much higher aspirations for your business than just being able to earn the minimum to support your family. However, you also need to be realistic and realize that it can take quite a while to build up the business to the point of meeting your goals. The feasibility study ensures that you can live comfortably while building your business.
Next, look at the minimum amount you need to earn per month and translate that into how many products or services you will need to sell in order to make that minimum. For example, imagine you are selling a service and you estimate that you will charge $50 per hour, with a typical project taking approximately ten hours. If your minimum amount to be earned is $4,000 per month (including monthly business operating expenses), then you will need at least eight new clients every month in order to support yourself and your family, and keep your business going. If you have conducted your market research, you will have a good idea if eight new clients per month in your industry is realistic.
In order to approximate your monthly operating expenses, and estimate your first year in business, create a spreadsheet with a column for each month, and one row for cash on hand, one row for cash from goods or services sold, as well as a row for each possible expense you may encounter. Don’t forget items like insurance, payroll, capital purchases, and sales and marketing. A good rule of thumb is to plan to spend at least 5% of revenues on sales and marketing activities. Start with the month you plan to officially start your business, and estimate (conservatively) what you could earn that first month. Subtract all of the estimated expenses – including your owner’s draw – and carry over the balance to the “cash on hand” row for the following month. Do not be discouraged if you have several months of negative balances. This is normal for most businesses and it is much better to be prepared for this prior to start-up than being surprised later.
Personal Considerations
A significant, yet largely overlooked, factor in determining the feasibility of any business is the personal situation of the owner. Especially for a small business, where the owner also conducts or at least oversees all of the daily operations, it is crucial for the individual to be prepared and able to follow through with the venture. Issues to take into consideration include family support, physical abilities, and mental and emotional preparedness. If you have a family, it is very difficult to achieve business success without their support and encouragement. Being a small business owner can mean added stress, financial fluctuations, and longer work hours, and one’s family needs to be prepared for these added pressures.
Make sure that you are either able to conduct all physical parts of the business or be prepared to hire help if necessary. While this may seem obvious, people often overlook the reality of the job in the excitement of opening a business. For example, do not open a restaurant if you cannot be on your feet all day unless you are prepared to hire someone or have a family member to help. Do not plan to have your store be open seven days a week unless you can commit to this schedule. It is better to start conservatively and build up than scale down later and irritate potential customers who show up when you unexpectedly closed. Likewise, owning your own business creates stress in the areas of time management and finances. Be sure that you are able to mentally weather out those storms and be emotionally strong to handle the ups and downs that are likely to occur in the beginning phase.
As you are completing this exercise to determine whether your business idea is feasible, remember that all of the pieces need to fit together to create a complete picture of success. One cannot succeed by having a great product without a market to buy the product or without the finances to manufacture the product. One cannot succeed by offering a needed service without spending money to market it. Similarly, the business will not meet your goals if you set a financial goal of work for five people but not plan to hire anybody. Operations, marketing and finances all need to work together to make a business succeed. It may first seem like an overwhelming task to conduct market research, prepare a cash flow statement, and think through every detail of operations. Yet this is a small price to pay for peace of mind and a stronger likelihood of success. Better yet, once you know what challenges you may face, you can change your strategy to overcome them ahead of time – before investing time and money. As a prospective small business owner, you are undoubtedly passionate about your work and eager to begin the journey of self-sufficiency that being self-employed offers. By conducting research first and starting with a plan, you can be assured that you can live your dream for many years to come!
