Chapter 2
ASSESSING YOUR BUSINESS CONCEPT

IN This Chapter
Common sources of business ideas
Manufacturing, service and retail business
A look at your business concept
Defining your business niche
Feasibility studies
Creating sales forecasts

Introduction
Deciding whether to start, acquire or grow a business is seldom easy. But you can simplify the process by evaluating your options in light of your goals, abilities and available capital.
A good business idea is one that’s affordable, appropriate and attainable. It has to be within your means, it has to fit your product and customers, and it has to be manageable given your schedule, your resources, and your other responsibilities. In short, it must be feasible.
This chapter will help you to take a detailed, objective look at your business idea and to decide whether it’s feasible at the current time.
COMMON SOURCES OF BUSINESS IDEAS
Where you got your business idea often determines the steps or obstacles involved in making it work. Common sources of business ideas include:
Prior job. Most new business ideas come from work experience. Every day, people working for every sort of business decide to strike out on their own.
Hobbies and interests. It’s natural to want to make a living doing something you really love. And for some people, it works out well. But it’s important to remember that hobbies and businesses are very different things. You may enjoy cooking, but that doesn’t mean you’ll enjoy running a restaurant!
Social issues and volunteerism. Some people discover a business idea as a result of charitable work, volunteering, animal rescue or related activities. For example, a person involved in water-safety issues might start a business that improves access to clean water.
Inventing a new product. Many people assume that inventing a new product is the best path to a successful business. In reality, this path can be long and difficult. Inventors often don’t realize how much time and capital it takes to bring a new product to market.
Knowledge of an existing customer base. Some customers may be so eager to purchase a given product that they’re willing to provide financing or to place an initial order large enough to establish the business. If you can find qualified buyers, you may be able to establish your company with limited risk.
Knowledge of unmet needs. If you’ve found an unfulfilled need, you might think all you have to do is leap into production before anyone else. Unfortunately, it’s not that simple. First, you must determine how large your market is, and what percentage of that market will provide enough sales to keep your business afloat.
Expanding a part-time activity. Keeping your full-time income and starting slowly can reduce the risks inherent in business startups. You have the opportunity to observe market demand; to grow with your interests and capabilities; and to develop your client base to the point where it can sustain a full-time business.
Professional or technical expertise. You may have a specific technical education, or have acquired useful skills through prior business experience. For instance, if you’re a nurse and want to move from hospital-based work to consulting for an HMO on healthcare costs, your schooling and work experience will obviously be major factors in your success.
Technology transfer is a less common business entry method in which technology developed by state and federal agencies is offered to small businesses for commercial development.
Licensing. Under a licensing agreement, you give another party the right to produce or market your product. In return, you receive a percentage of income from its sale. Licensing is also beneficial if you want to manufacture or distribute a product trademarked or copyrighted by someone else.
Buying an existing business or franchise. Although this may not offer the same creative opportunities as building your own business, there will still be many ways to express yourself, such as improving the business’s image, expanding the customer base and streamlining operations. For more information, see Chapter 30 Valuing and Buying a Business.
Buying a good idea. Sometimes people are willing to sell an idea because they don’t have the desire, time, or money to start a business of their own. It’s usually best to choose a product and market with which you’re already familiar. To find inventors who are looking to sell their ideas, you can consult a local business broker or inventor’s club. You can find the inventor’s club nearest you by visiting www.inventorsdigest.com.
Joint venture. If you have an idea you believe in, but you don’t have the capital or knowledge to exploit it, consider finding a partner with the skills or resources you lack.
Meeting temporary needs. Rental businesses are springing up for tools, college textbooks and even baby clothes. What all these businesses have in common is that they provide temporary access to products that people normally use for a limited time.
Greening an existing product. Many successful businesses started out by taking an ordinary product and making it better for the environment. Examples include biodegradable utensils and solar-powered phone chargers.
Finding a new way to deliver an old product. Many entrepreneurs make their fortunes by changing where and how people buy an existing product. For example, people used to go to video stores to rent movies. Now, they can also rent them from Netflix or vending machines outside convenience stores.
Manufacturing, Service and Retail BUSINESS
Most businesses fall into one of these categories, which we will examine in turn.
Manufacturing
Manufacturers buy raw materials and turn them into a finished product that they sell to consumers (B2C), or to other businesses as inputs for another product (B2B). Usually, manufacturers sell to retailers or wholesalers. But smaller manufacturers often sell directly to customers.
Manufacturing Trends
Cloud-based supply chains. Supply chain management is moving from centralized decision makers to collaborative networks of people and machines that respond to supply and demand in real time.
On-demand manufacturing. Goods are increasingly manufactured when, where and how customers want them. Ongoing IT convergence, and improvements to technology like 3D printing, facilitates this process.
Servicizing. Many consumers are choosing to pay for the services provided by manufactured goods instead of buying the products themselves.
Transparency. Consumers are increasingly looking for authenticity, responsibility and accountability in manufactured goods. For this reason, transparency about production processes and the source of raw materials is often important for manufacturers.
Next-shoring. The need for faster delivery times is making offshore manufacturing less feasible for some goods. Instead, facilities are likelier to be sited near primary customers.
Major Operational Issues
Manufacturing issues include:
Automation and IT convergence
Competitive positioning
Which geographic markets to serve
Which distribution channels to use
Reducing lead times and delivery times
Counting and valuing inventory
After-sales service and support
Quality control
Quality/price tradeoff
Health, safety and environmental concerns (including waste disposal)
Controlling costs for materials
Customers
Customers of manufacturing businesses usually expect timely delivery, close communication, flexibility and customization.
Suppliers
Manufacturers rely on suppliers for their raw materials, so they need to pay close attention to their supply chain partners. They often build close relationships with suppliers and engage in collaborative problem-solving.
Employees
Manufacturers usually rely on skilled employees to maintain quality control, provide customer support and drive innovation. Therefore, manufacturers tend to invest a lot of time in training their employees and reducing employee turnover.
Even if you are the sole employee of your manufacturing business, the same rules apply: Creativity, technical skill, continuous learning and customer service are central to manufacturing success.
Quality
Whether they make identical or one-of-a-kind items, manufacturers must set strict quality standards and meet them consistently. They typically choose raw materials carefully and inspect the product for quality at each production stage.
“Strict quality standards” doesn’t mean that every product must have the highest possible quality. Instead, it means you need to set a basic quality level—one that’s appropriate for your product, price and customer—and stick to it. Whether you make 50, 500 or 5,000 items, all of them should meet the same quality standard. This is one of the trickier aspects of running a manufacturing business, but it’s crucial to success.
…
William and I were very careful about market research when we started out. We tried to do everything by the book. Our professors used to tease us because we wanted certainty in areas that are murky by nature. We were willing to laugh at ourselves about it, but regardless, we believed that our attention to detail was a strength. And when we started Green Fire, it seemed to serve us well.
The main downside is that sometimes, when a great idea drops into our lap, it takes us a while to realize it.
Fiona MacLeod and William Sharp run Green Fire, an online business headquartered in Boise, Idaho, which sells athletic equipment to adult players of recreational sports. Their chosen market niche was the result of extensive research conducted during their last year of college at the University of Idaho in Moscow.
One day, a sales representative from Webfoot, makers of an all-weather sports sandal, contacted Green Fire about selling their sandals. Fiona was interested; she had worn the sandals during a four-day hike through the Scottish Highlands, during which she encountered many kinds of weather and terrain. She was very happy with the sandals, and had even called Webfoot to say so when she got home.
In many ways, adding the sandals seemed like a good idea. But Webfoot clearly had a different target market than Green Fire. William and Fiona worried that the sandals wouldn’t fit into their current product mix.
…
Service Businesses
The service sector is the largest and fastest-growing sector of the U.S. economy, probably because service businesses are relatively inexpensive to launch and can often be run by only one person.
Because the service sector tends to be easier to enter, service providers may find it hard to get noticed. For this reason, service providers need to be good at selling themselves and earning loyalty.
Service business trends
Downsizing. Big companies are laying off employees and relying on outside or virtual service providers for everything from editing to answering phones.
Round-the-clock availability. Customers expect service providers to be available on demand. Even if they don’t expect service, they expect prompt responses to communications well outside of the “normal” work day.
Collaboration. Service providers are increasingly partnering or sharing workspaces. For instance, a mechanic might partner with a car detailer to offer a package deal of a tuneup and cleaning.
Major Operational Issues
Challenges for service businesses include:
Customizing services to individuals
Differentiation from competitors
Maintaining professionalism
Measuring costs and pricing services
Quality control and consistency
Time management and scheduling
The need for special licenses, permits or ongoing training
Customers
Compared to manufacturers and retailers, service businesses tend to be flexible as to how, where and when they serve customers. Also, many service businesses have an ongoing relationship with their customers. Some of them even involve customers in the design and delivery of their services.
Trust is a big issue for service consumers, so references, experience and training are usually very important. The more trust a job involves, the more these concerns come into play. Especially for service providers who impact customer safety (auto repair), finances (tax preparation) or self-image (hair styling), building trust is a basic requirement of doing business.
Quality
Characteristics of excellence in service businesses include:
Measuring customer satisfaction
Outperforming competitors
Continuous improvements in knowledge, service and communication
Using technology to improve service
Security and confidentiality
Retail Businesses
Roughly 30 percent of new U.S. businesses are retailers. Most of them buy goods from wholesalers or manufacturers and resell them to consumers.
Unlike manufacturing and service sales—which might take place over days, weeks or months—retail sales tend to happen in 30 minutes or less. Because retailers have so little time to earn customer loyalty, excellent customer service and sales skills are especially important to their success.
Retailing Trends
Consumer experience. Creativity and innovation matter more than ever in creating a successful retail operation.
Servicing. The shift from owning goods to renting them has huge implications for retail businesses as well as manufacturers.
Mobile shopping functionality. As social media become shopping platforms—and phones double as payment devices—many distinctions between online and offline shopping are likely to fade and vanish.
Location
When evaluating a retail location, consider:
Concentration of target customers
Growth or decline in population
Income and spending patterns
Competition
Government incentives for business relocation or startup
Health of the local economy
Types of customers and businesses in downtown, suburban and residential areas
Access and public transportation routes
New construction or development
Appearance of the area
Local bankruptcies or closures
When narrowing the selection to a specific site, consider:
Corners (higher visibility, more traffic)
Parking and traffic flow
Image of the neighborhood and building
Location and number of competitors
Zoning restrictions
Nearby landmarks and attractions
Nearby businesses with complementary or attractive products or services
Opportunity for expansion
Internet and networking capabilities
Monthly rent and maintenance charges
Pedestrian traffic patterns
Security for customers and employees
Former tenant’s reason for closure
Store Design
Retailers must create a space that attracts visitors to buy and return regularly.
Signage should be easy to see, read and understand. It should also complement your business concept and brand identity.
Show windows present the most compelling reasons for customers to come in and buy. Window displays should be kept clean and current. Get help from a professional designer or a creative friend to create colorful and enticing displays.
Store entrances should be clean, inviting, and wide enough that customers can easily enter and leave the store. It is important to keep the area immediately in front of your store well swept and clear of debris, ice and snow.
Selling areas should facilitate merchandise displays and interaction between customers and employees. Also, remember that employees need at least 30 inches of clearance space for easy movement behind counters.
Lighting showcases merchandise and creates your desired atmosphere.
Decor or theme. Paint, wallpaper, photos, pictures and murals can all create the right selling environment for your business. If possible, have an interior designer develop an attractive theme.
When choosing these components, think carefully about the needs of your target customers. Parents with very young children will need space to manoeuvre strollers, as well as rest rooms with a changing table. Customers with disabilities may need special features like wheelchair ramps and handrails. Older customers may need a place to sit and rest, while young children may need a play area to distract them while their parents shop. Don’t overlook customers with special needs when designing retail space.
Major Operational Issues
Inventory management. Effective managers use sales forecasts to plan for their inventory needs and ensure the fastest possible turnover of merchandise.
Flexibility. Retailers must be ready to adapt to evolving customer needs.
Expertise. Product knowledge is essential in a small retail environment.
Negotiations. Retailers must negotiate with suppliers to get good prices and timely deliveries.
Security. Shoplifting, employee theft and robberies are inherent risks of retailing. Controls, safeguards and careful cash management are essential.
A Look at Your Business Concept
In the previous chapter, you took an honest look at your personal strengths and weaknesses. Now, you must take an equally honest look at the strengths and weaknesses of your business idea.
The Business Assessment Worksheet will help you decide whether your idea is viable.
Defining Your Idea
Most business ideas are based on one of the following concepts:
Selling a new product to a new market
Selling a new product to an existing market
Selling an existing product to a new market
Selling an improved product to an existing market
Each approach has pros and cons. Selling a new product means you’ll have fewer competitors, but it may involve more risk. Selling an improved product means you’ll probably have a better sense of your market, but you may find it harder to get attention.
Which approach is best depends on your skills and interests, as well as market trends. Here are some basic questions to ask:
What business am I in?
What products do I offer?
Who are my target customers?
Why will they buy?
When will they buy (weekdays or weekends; seasonal or year-round)?
Where will they buy (online or store)?
How will they find my business?
How much will they pay (pricing)?
How, when and why will my business grow?
After answering these questions, you should be able to write a brief definition of your business. Here’s an example:
Simply Shoes is a retail shoe store located at the corner of Fifth and Main. Simply Shoes sells discounted medium- to high-quality dress and casual shoes to adult and young adult customers, by virtue of its strong relationship with brokers and manufacturers.
Over the coming year, we plan to increase style and size selection, double sales, and develop a loyal customer base through friendly and attentive customer service. Our marketing strategy calls for targeted marketing to identified customer groups, and projected sales of $350,000 for the coming year.
We will remodel our existing space, providing more visibility for merchandise, and room for a wider variety of styles. Brand identity, merchandising, innovation and showmanship are fundamental to our success.
Researching Your Idea’s Viability
Once you’ve defined your business idea, it’s time to test it against financial, political and economic reality and determine whether to move forward. Consider these questions.
Is there strong evidence of an unmet need for your idea? Look online as well as locally and regionally.
Is anyone else already doing it? If so, can you do it better? If nobody is currently doing it, why not?
Is the product safe and legal?
Are raw materials, supplies, equipment, and production resources available?
Do you need to protect your idea with a patent or copyright?
How will you distribute the product?
How many competitors do you have? What are their strengths and weaknesses? How do they package, market and price their products? What is your competitive advantage?
Why does the opportunity for your business exist? Will it exist long enough for the business to become profitable?
Is there room for growth? Can your idea be expanded into additional products or services, or new markets?
Do you have adequate capital?
Will you earn an adequate return on your investment? When will you reach your break-even point and have a positive cash flow? Is your payback period fast enough to allow you to stay in business?
How sensitive are your financial projections to variations in assumptions?
What are the economic trends in your industry and in general?
What is your maximum possible financial loss or gain?
We will help you answer many of these questions in the coming chapters. But you should also talk things over with friends and family. Retired business executives, professors, bankers and SBA groups can also provide valuable critiques of your concept. It’s easy to be too optimistic or too pessimistic about your own ideas, so get feedback from people you can trust.
If you conclude that your idea is probably not viable, should you scrap it? Not necessarily! Maybe the idea just needs a minor adjustment. Try looking at it from different angles, and make sure that you’ve accurately identified the benefits, targeted the right customers, and chosen the right method of distribution. Often, a small change in design, marketing or distribution can save an idea that seems like a dud. Even if that doesn’t happen today, it may happen a week, a month or a year from now. Keep your scrapped concepts on file, just in case they contain an idea you can use later.
Your idea should seem viable to you and your family, friends and mentors. But it should also excite you. As we’ve said before, entrepreneurs who are passionate about their business ideas not only work harder and enjoy themselves more, but are also more likely to succeed.
…
People have very funny ideas about risk. A couple of our friends thought it was strange that we didn’t jump at the chance to work with Webfoot and ask questions later. One of them said, “I’ve always thought of you guys as big risk takers.”
William and I love to travel, and we’ve taken some unusual trips over the years. I spent several months in Haiti doing aid work, and he’s traveled down the Urubamba and Amazon rivers. I think that because these are things many people think of as risky, they find it odd for us to be such cautious businesspeople.
To me, there’s no contradiction whatsoever. If you’re going to travel to a remote area or go down a river or climb a mountain, you plan ahead, period. Different things are at stake in a business, usually, but the basic logic still holds.
William and Fiona decided to conduct a feasibility study on adding Webfoot sandals to their product line. They started out with a SWOT analysis for Green Fire. Here’s what they came up with:
Strengths
Well-defined market niche
Very productive mailing list
Good reputation, as measured by many new customers from referrals
Weaknesses
Green Fire is poorly capitalized
Well-defined market niche limits new product possibilities
Owners often feel overworked and pressed for time
Opportunities
Expand product offerings by adding Webfoot sandals
Threats
Cash flow problems due to lack of time and resources needed to market new inventory item
Larger online retailers could easily dominate the market
…
DEFINING Your  Business Niche
A market consists of sellers who compete to meet the needs of buyers. Some businesses target mass markets that consist of many people with general needs, such as clothes buyers or cellphone users. Others target niche markets, which consist of a small group of customers with very specific needs, such as cloth diapers.
Small businesses usually target niche markets, because it’s easier and tends to take much less money. Also, there’s usually less competition.
Larger companies tend to target mass markets. But even in cases where they do target niche markets, smaller businesses often have an advantage, because they can compete on the basis of flexibility and personalized customer service.
Market segmentation is the process of breaking a mass market into smaller niche markets. It helps you find the customers who are most likely to buy your product, which reduces the time and money you must spend on promotion.
As an example, consider shoes. We all wear them, but we don’t all wear every kind of shoe. Younger people are more likely to wear sneakers, joggers are more likely to wear running shoes, people who go hiking are more likely to wear hiking boots, and people who live in rural areas are more likely to wear cowboy boots.
Clearly, it doesn’t make much sense to advertise hiking boots to everybody. Instead, you should target the people who are most likely to buy that type of shoe.
To find your target market, you might start by considering three things:
How old are your target customers?
What are their interests and hobbies? What do they do for recreation?
Where do they customers live? Are they urban or rural? Eastern or western? Is the land mountainous or flat?
These questions represent three basic types of market segmentation:
Demographic segmentation sorts customers by factors like age, gender, marital status, education and income.
Psychographic segmentation looks at their opinions, culture, beliefs, values, lifestyle, recreational activities and entertainment preferences.
Geographic segmentation sorts them into groups based on where they live. Depending on your product, you can group them by country or neighborhood; by urban, suburban or rural environment; or even by climate (mild versus harsh winters; floods versus tornadoes).
Suppose you plan to sell skateboard parts. Naturally, you would target the market segment that rides skateboards. In demographic terms, this probably means people who are 25 or younger.
But is everyone who’s younger than 25 in the market for skateboard parts? Of course not. That’s why you need psychographic data. Looking at the lifestyles, opinions, reading habits and musical preferences of your target customers narrows things down a lot more, and it also helps you choose the right promotional strategy.
Last, you should consider skateboard sales by geographic region. They tend to be higher in urban and suburban areas, and lower in rural areas that have fewer paved surfaces.
Things to look for in a niche market include:
Clearly defined and measurable (skateboarders aged 12 to 25).
Worthwhile size and sales potential (how many customers are there, and what do they spend per year on skateboard parts?).
Unmet needs (no parts shop in the area).
Growth rate (stable or expanding).
Presence and strength of competition, locally and online.
Percentage of the market you can realistically target, given your budget, capabilities and competitors.
Percentage of the market you must capture to earn a profit.
Differentiating Your Business
The Business Differentiation Worksheet will get you thinking about the things that make your business special. What does your product do? What needs does it meet, and what problems does it solve? How is it different? What makes it exciting? Why will customers want it?
When considering these questions, think about what you’re really selling. For example, are you cutting hair, or are you selling beauty and self-confidence? Are you offering child care, or are you selling security? Understanding what motivates your customers will help you communicate your product’s benefits.
Your Customer Profile
Your competitive advantage comes from offering your customers more value than your competitors do. To do this, you have to know what your customers value. That’s one purpose of market research.
By researching your customers, you’ll learn what kind of people or businesses they are, how much they spend on your type of product and why they buy. Understanding your customers helps you choose the merchandise and services they want, and focuses your promotional efforts. Someone who doesn’t want or need what you’re offering won’t buy, no matter how good your product is!
In fact, identifying people who are not your customers can be a good way to start creating your ideal customer profile. For example, if you know that people who are over 60 don’t spend much on your type of product, you can use that as a starting point. By defining who your customer isn’t, you’ll soon find out who your customer is.
You should also think about your target customers’ attitude toward new technology, as well as the role of technology in the customer’s career, family life and leisure activities. This is relevant to how you communicate with customers, who your competitors are and so forth.
Next, condense this information into short, clear statements to create a customer profile that describes your target customer. It’s often helpful to create a fictional portrait of your ideal customer, like this:
My ideal customer is a woman in her late teens to early 30s. She lives in a city or a smaller college town and has at least some college education. She makes $30,000 to $50,000 per year and spends about $300 per year on beauty and grooming products. Of that, about $75 is soap and shampoo. She favors organic, nontoxic products in recycled packaging. She usually buys online to save money, but she’ll pay a higher price for products from a local street fair or farmers’ market.
If you will be undertaking business-to-business selling (B2B), you should create a similar profile for business customers.
Fill out the Customer Profile Worksheet to define your current concept of your ideal customer. As you continue your research, you can refine and improve this profile.
Feasibility Studies
An entrepreneur who wants to start, grow or change a business should always engage in an abbreviated planning process to determine whether to proceed with the new venture. This is called a feasibility study.
Suppose you own a successful hobby store, and you have an opportunity to expand into an adjacent space that just became vacant. Is this a good idea? If so, should you increase your inventory of existing products or offer new product lines? How much can you afford to spend on remodeling? Should you raise prices to pay for the expansion?
Small-business owners are continually confronted with opportunities—and questions—like these. Often, it’s not possible to complete a comprehensive business plan before making a decision. Preparing a feasibility study is quicker and can greatly reduce your risk. It enables you to take a realistic look at the benefits and costs of your business opportunity, so that you can decide whether it’s appropriate, affordable and attainable.
A feasibility study can also gather some of the information you will need in order to complete a thorough business plan. This makes it a win-win proposition; if your idea isn’t feasible, you’ll save a lot of time by not preparing a business plan. If it is feasible, you’ll have a head start on completing your business plan, as well as a document you can present to potential funders as evidence of your thoroughness and organizational skills.
A business idea that’s worth pursuing will satisfy all applicable feasibility tests:
SWOT analysis. When choosing a course of action, you need to take an honest look at your strengths, weaknesses, opportunities and threats. When strengths and opportunities outweigh weaknesses and threats, there’s a good chance your idea is feasible.
Financial feasibility. If your business idea is not financially feasible, it’s senseless to investigate it further. Consider whether your idea will bring in enough revenue to cover your expenses. Don’t forget to consider the cost of borrowing money to accomplish your goals. If these funds will come out of normal operating profits, you must weigh this against borrowing, or utilizing the profits for other ideas.
Feasibility of sales volume. Any idea can seem financially feasible if you assume a high enough sales volume. Can you really achieve the sales volume you need to make your idea work? This is an area where many entrepreneurs falter, usually by being too optimistic.
Marketing feasibility. If your opportunity passes the sales volume test, you must develop a marketing plan that will outline how your business will reach the projected sales volume.
Feasibility of personnel. The best idea in the world won’t succeed if you don’t have—or can’t hire—the staff to make it succeed. It’s vital to have employees and contract workers who have the skills you need and believe in your product.
Logistical feasibility. Common considerations include the ability to find suppliers, manufacture the product, and provide customer support and service.
When to Do a Feasibility Study
A feasibility study can be done before preparing a business plan or modifying an existing plan.
Before starting or buying a new business. Conducting a feasibility study will help you identify and address serious problems and threats associated with your new business idea.
Before expanding an existing business. Business owners continually face decisions such as whether or not to add new product lines or find a new business location. Owners who knows how to perform a quick feasibility study are more likely to make a smart choice.
The techniques covered in this section can also help you look at changing your prices, purchasing additional advertising, and almost any other decision that changes the numbers for your business.
When Not to Do a Feasibility Study
Although we emphasize the importance of planning throughout this book, we also recognize that in some cases, it’s simply not possible for a growing business.
If a project is similar to one you’ve previously completed, or the amount of money and resources at stake is minimal, it’s probably safe to skip a feasibility study.
If you’re pretty sure that you’re going to move forward regardless of what a feasibility study says, there’s no sense in conducting one; you’d be better off using the time, attention and effort to make sure your efforts succeed. A feasibility study is only as good as the effort and data that go into it. If you can’t commit to producing a thorough and objective study, there’s little point in taking the time to produce an incomplete and biased one.
…
Our SWOT analysis showed we were right to be concerned that adding Webfoot sandals would weaken our competitive position. But it wasn’t cut and dried enough to scare us off.
It was one of those tricky gray areas where, if you aren’t careful, you can end up being skeptical just for the sake of skepticism, or optimistic just for the sake of optimism. Neither of us likes those wishy-washy gray areas. We always prefer to get to the bottom of things by digging deeper into the numbers.
The sales representative from Webfoot had told William and Fiona that the minimum initial order was 200 pairs of sandals. The sandals cost an average of $50 per pair plus freight, so their initial inventory would cost $10,000, plus $150 in freight charges. They estimated a cost of $300 to modify the layout of their catalog and website to make room for the sandals. A professional photographer would cost another $300. Based on past experience, they budgeted another $250 for unexpected costs. Therefore, the initial startup cost for adding the sandals was $11,000.
Because the sandals would take up about 4 percent of their total catalog space, they decided that the sandals would have to cover 4 percent of the printing and mailing costs, in addition to customer database and website maintenance. Using this formula, they estimated their promotional costs at $405, for a total cost of $15,050.
Their research indicated that they could sell the sandals for an average of $110 per pair, plus shipping. Once they sold 137 pairs of sandals, they would cover their total cost of $15,050.
William and Fiona felt a bit more optimistic. But could they really achieve that sales volume?
…
Outline of an Initial Feasibility Study
This section explains how to prepare an initial feasibility study by assembling its main sections in the following order:
Scope of the business concept
Results of SWOT analysis
Financial feasibility
Sales volume assessment
Conclusion
The details of the study will vary according to whether you’re starting a new business, buying an existing business, or expanding an existing business.
Starting a new business
Step 1: Scope. Define your business opportunity. Are you introducing new products, or improving existing ones? Or are you changing some other area, like energy use or production methods? (Please note that we use the term “product” to refer to products and services, except in cases where it’s necessary to make a clear distinction between the two.)
Step 2: SWOT analysis. Strengths and weaknesses relate to internal areas like marketing, personnel, management and finance. Opportunities and threats relate to external factors like competition, technology, economic and political conditions, and social trends. Note that external threats often result from internal weaknesses, and external opportunities from internal strengths.
Step 3: Financial feasibility. This is a four-step process, the individual elements of which will be explained later in this book.
Determine the startup costs for your opportunity and how much financing you need. Startup costs include professional fees, remodeling, licenses and permits, inventory, equipment, vehicles and other fixed assets.
Budget your annual operating costs, and determine which are fixed and which are variable. Annual operating costs should be calculated on a cash basis and include sny debt servicing.
Perform a break-even analysis to identify the annual sales volume needed to cover startup and operating costs.
Determine whether you will finance out of regular profits, or borrow to accomplish your goals.
Step 4: Feasibility of sales volume. Perform a market assessment to determine whether your break-even sales volume is realistic. First, it’s important to define your business concept and your target market concisely. During the SWOT analysis, you examined the industry and the competition. These are also important considerations when assessing sales volume.
Completing cash flow projections will help to ensure that your ideas are financially sound, and prepare you to manage cash shortages and surpluses. To do so, you must examine all the expenses associated with your new idea and prepare monthly sales forecasts for a three-year period. We discuss how to do this in later chapters.
Step 5: Is the idea feasible? Now it’s time to make a simple yes-or-no decision. At this stage, you may want to return to Step 1 and revise your responses to the first four steps.
Acquiring a Business
In this case, the five steps are the same as in the previous section, but you will perform them a little differently. Include the present owner in the process, and obtain copies of her business records if possible. The first time you go through the five steps, you should analyze current business operations. Remember: You are purchasing the business as it is, not as it could be.
For future iterations, you can modify the business concept, SWOT analysis, financial data, and so forth to reflect the potential of the business. Be very careful when making these modifications! If your first attempt suggested that you should not buy the business, but you still want to, it is easy to make unrealistic changes in order to “prove” to yourself that the business is feasible. (See Chapter 30 Valuing and Buying a Business for more information.)
Expanding an Existing Business
Step 1. Does this opportunity require you to redefine your current business concept? If so, how substantial is the modification? This is an initial feasibility check. Ideally, the opportunity will fit your business concept or need to be modified only slightly.
Step 2. Review the results of your previous SWOT analysis and determine whether any changes are required. Do the changes indicate a better or worse competitive position? A good business opportunity should result in an improved position.
Step 3. Here, you have the same three steps regarding financial feasibility as those described for starting a new business. The difference is that you start with your present annual operating costs and make adjustments from this baseline.
Startup costs. No opportunity is so simple that you won’t have startup costs!
Annual operating costs. In most cases, you’ll find that these costs will increase. They may not change, but take a good look just to be sure.
Break-even analysis. This is done only for startup costs and annual operating costs for the new business opportunity.
Step 4. A sales volume assessment answers the question: “Is the incremental sales volume realistic?” Be sure to review your industry and competitive analyses.
Step 5. The “yes or no” conclusion is a little more complicated for an existing business. You may decide to pursue an opportunity that is not feasible in the short term, because you have a strong belief that it’s the right move in the long run. Obviously, your existing business must be profitable enough to support this decision.
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The numbers were really not that bad, and we probably could’ve just gone for it at that point. The main thing stopping us was the fact that we had to buy 200 pairs of sandals as initial inventory.
It wasn’t that we didn’t think we could sell them; we knew we could sell 123 pairs eventually. The question was whether we could sell them fast enough to avoid cash flow problems. William ran the numbers and he felt that we needed to break even within three months, just to stay on the safe side. That made us wonder if we might be able to negotiate better terms.
It turned out that they could. Fiona contacted Webfoot and negotiated an option to return any sandals that didn’t sell within the first three months. There was a restocking charge of $10 per pair, but it was worth it. The arrangement greatly reduced Green Fire’s financial risk.
Now, the question of sales volume was less important. They viewed this as a chance to test-market the sandals and decided they were ready to proceed.
…
Outline of a Complete Feasibility Study
If the results of your initial feasibility study are positive, this should encourage you to prepare a complete feasibility study containing the following sections:
Cover page
Executive summary
Definition of the business concept*
Results of SWOT analysis*
Financial feasibility*
Sales volume assessment*
Marketing
Personnel
Logistics
Conclusion
*Indicates sections already completed as part of your initial feasibility study.
Marketing
Having looked at your industry and competition, you believe you can achieve the sales volume you need. Now, you must decide how to achieve it.
How will I differentiate my product from competing brands? How will I promote my product to my target customers?
What price are my customers willing to pay, and how will this affect my profitability and sales volume?
How will I deliver my product? Will the method I’ve chosen meet my customers’ needs and expectations?
Personnel
Assess the ability of your personnel to take advantage of the business opportunity. First, look at the capabilities of your outside advisors, managers, and employees. List key tasks at your business, and determine who will perform them.
Logistical Feasibility
Next, you need to look at everything involved in sourcing, manufacturing, storing, selling, shipping, tracking and servicing your product.
Materials and equipment. What materials, parts and equipment do you need to produce your product? Where will you get them? Do you have the manufacturing space you need? Will product substitutes perform as expected and meet the required specifications? Will existing equipment be able to meet increased sales, or will you need to expand? If your product is manufactured elsewhere, will that facility be able to meet your needs if you grow?
Suppliers and partners. Who are your suppliers and partners? What services do they provide? Can they meet your needs if you expand or change your business?
Transportation. How will you ship your items? Do they require special handling, documentation or licenses? Do discount rates apply? Can your transportation system handle an increase in volume if sales take off? If you offer services, how, when and where will your personnel deliver them to clients?
Business location. Do you need an additional or new retail outlet, warehouse, factory or distribution hub? How much parking do you need for customers, employees and company vehicles? What are your zoning requirements? Should you be in a retail or industrial district? Do you need to be near other facilities (e.g., an airport, train station or shopping mall)?
Other technology. Do you need telephone networking or videoconferencing systems? Inventory management, customer management, or accounting software? Cash registers, checkout scanners, credit card or check processing? Devices to accommodate people with disabilities (e.g., automatic doors)? Alarm or camera systems?
Legal Feasibility
You must research all applicable local, state and federal laws when developing, producing, selling and delivering your product. You should also consider intellectual property issues (i.e., patents, copyrights, trademarks, nondisclosure and licensing agreements).
Conclusion
Last, take a thorough look at your feasibility study. Review the business opportunity in terms of personnel, finances, markets and other factors. This is your final chance to refine your idea before implementation.
Executive Summary
After you’ve completed your feasibility study, write a one-page summary that can be easily understood by people who have no special knowledge of your business.
Cover Page
Prepare a cover page with your business’s name, address and contact information. Include the date on which the study was prepared, and the names of the owners.
Creating Sales Forecasts
Sales forecasts predict how much of your product you’ll sell to your target customers over a specific period of time. They also help you estimate how and when your business will become profitable. It may take six months or more to break even, so you need to know how much it will cost to keep your business open until it can sustain itself through sales.
You can create forecasts for target markets, geographic regions and specific products. Sales forecasts are also useful for cash flow projections; planning production schedules; and allocating time and resources.
Sales forecasts should be ambitious but realistic. It’s fine to set a challenge for yourself, but you must be able to achieve it within the specified timeframe. Most important, you must be able to back up your forecasts with credible data.
Here are some common approaches:
Breakdown forecasting looks at your largest population of prospects and then estimates the sales you can expect from target customers. First, you gather data on the population of your trade area. Then, you figure out the number of target customers by age, income, needs, preferences or buying patterns. Last, you estimate how many times each customer will buy your product per year. Useful resources for breakdown forecasting include census reports; articles in national marketing magazines; state department of commerce data; and information gathered from your own surveys or interviews.
Buildup forecasting estimates the size of each market segment and combines them. For example, a business that sells children’s bathing suits might calculate how many children between the ages of 5 and 12 live in the four surrounding counties, and then add these numbers to estimate the total market size.
Indirect forecasting is a method businesses use when they can’t get specific market data. Instead, they gather related data that indicate the size of the market. For example, if you can’t find information on bathing suit buying patterns, you might gather information on total spending on summer play clothing for children. You could also gather data on the number of swimming pools in the surrounding counties and the number of children enrolled in swimming lessons. You often have to be creative to find useful indirect data.
Forecasting can be especially tricky for entrepreneurs who are offering a brand-new product. They often use industry publications, trade associations or business periodicals to research typical costs and profit levels for similar businesses or products. Generally, researching the data is harder than doing the actual forecast. And of course, the better your market research is, the better your forecast will be. There are also many professional forecasting companies that offer both general and highly specific forecasting information.
No matter which method you use, it’s always best to err on the side of caution. Forecasting a high level of sales may not be realistic, especially in the startup phase. Instead, aim for a realistic estimate of sales. You can also improve your profitability by looking for ways to lower your costs, which may be easier than achieving a high sales level during the startup phase.
Using Your Sales Forecast
Tying your sales forecast to specific business activities is very important for lenders and investors, who always want to understand how you will make your forecast work in the real world. How many sales calls will you make to convert a prospect into a customer? What form of advertising will you use to drive interest in your product? How many customers will your ad campaign attract?
Tying the sales forecast to the rest of your business plan is also important. For example, your sales forecast should be supported by your selling strategy. This explains how you will earn more sales revenue, which in turn shows that your business will be profitable.
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After finalizing their agreement with Webfoot, William and Fiona took a number of approaches to marketing their new line of sandals. First, they marketed the sandals at a reduced rate of $90 per pair to their existing customers and social media followers. Second, they bought a mailing list that targeted whitewater rafters and kayakers and sent out a PDF brochure.
They also inadvertently launched a successful content marketing campaign. Fiona was a talented writer and photographer, and she kept a popular blog detailing her outdoor adventures. She had already described her hiking experiences in Scotland, and she included a heartfelt plug for Webfoot sandals. Her posts appeared on Green Fire’s website as well as their various social media channels. Although they hadn’t intended this as a specific marketing tool for Webfoot, the response was very positive; they sold 49 pairs of sandals from the blog story alone.
We didn’t end up returning any sandals to Webfoot. In fact, we broke even in just over two months and ended up ordering more.
As I say, it’s funny how people think about risk. You could say that we didn’t need to run a feasibility study; the amounts were small and the risk was minimal, especially when you compare it to the stuff William and I do for fun.
But our feeling is that it’s good for caution to become a habit. Once you develop that discipline, you make better decisions under pressure. You’re not spinning your wheels, asking yourself what to do next.
Logically, if it’s worthwhile to ask whether something is feasible, then it’s worthwhile to answer the question as clearly as you can. That’s still our attitude, and it still serves us well.
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Conclusion
Whether you’re launching a new venture or taking a current business to the next level, your success depends on taking a good, hard look at the feasibility of your plan.
Once you’ve completed the worksheets for this session, you may decide that your business idea isn’t viable, or that this isn’t the right time to pursue it. That’s a good thing. It gives you a chance to come up with a new idea, or to launch your business when the time is right.
But more likely, you’ve decided that your idea really does look promising. In the next chapter, we’ll closer look at the steps involved in developing your business plan.

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Indicators of Business Viability Government or industry data show a strong trend. If reliable data show a growing demand for your product, and other businesses in your area aren’t meeting that demand, this could indicate a good business opportunity. Similar businesses are doing well in similar places. Suppose you plan to sell bird feeders in Idaho. If a similar business is booming in Montana, this could suggest that you’ll be successful. However, the comparison needs to be valid. For instance, a new type of snow shovel may sell very well in Duluth, Minnesota, but that doesn’t mean it will be popular in Tempe, Arizona. Media reports identify new or growing demand. News stories on new trends may provide evidence that your business idea is viable. Be cautious, though. Sometimes, media only notice a trend after it has peaked. In other cases, they may be using a PR firm as a source.

| NxLeveL® TECH TIP BUSINESS RESOURCES AND THE WEB
Research Sources The following sources can help you research your target customers and markets: The U.S. Census Bureau’s County and ZIP Code Business Patterns can help you study regional economic activity, analyze economic changes over time, research market potential, and develop sales quotas and budgets. census.gov/econ/cbp/index.html Census Bureau Publications compile various demographic data for large and small areas, including young adult mobility, computer and Internet use, and foreign-born population trends. www.census.gov/library/publications.html Small Business Development Centers (SBDCs) provide free or low-cost help to aspiring entrepreneurs. Your local SBDC can help you understand and conduct feasibility studies and market research. www.sba.gov/tools/local-assistance/sbdc SCORE offers Webinars, workshops and mentoring on many business topics, including market research. www.score.org