Whether you are starting a business from scratch or are looking to add a new business concept on to your business, it is important to understand the feasibility and long term viability of your business idea before you spend your life or your company savings along with your valuable time. This is also a very important step before approaching a financial institution for financing. In most cases a financial institution does not need a detailed 60 page business plan, they just need to know that your overall business strategy supports your financials. This is what a feasibility study accomplishes. It looks at your business strategy and provides you with recommendations on what you need to do in order to meet your financial targets. There are certain areas that a financial institution or investor will look at when making a decision on lending your money or investing. Here are the key areas to focus:
Target Market Analysis
Understanding your target market and size is important. It is very hard to determine if you have a viable business without knowing your potential market. This does not ensure you can penetrate it, but it shows that you understand the market and that is who you are going to target for selling your products and services.
Skin in the Game
If you are asking a financial institution or investor to provide funding for your business, they want to understand how much you plan to invest yourself in your business. Depending on the type of loan, you may not have a chance to receive any funding unless the lender can see that you are willing to take a risk in your business by investing your own personal or company's money and time. Why would you expect others to invest if you cannot show them that you believe and are willing to take a risk in your own business. If you are showing you are taking a high salary in the company in first few years before you are profitable, this shows a banker/investor that you are not really willing to take the risk in the business and have skin in the game and could be an area of concern.
Management and Staffing
You want to make sure that you can show that you have background and experience in the area of your business idea or that you have advisors or other management staff that can help you. Just because you like good food and like to cook does not give you the credibility needed to a financial institution or investor to show you can be successful running a restaurant. This is key to lenders and investors, as they are lending the money to you and are betting the success of the business on your ability to execute on your business strategy. If you do not have the background and experience, it is important that you hire others that do, or find those that have experience to be on your board of advisors. This can include lawyers, accountants, management consultants, or other entrepreneurs that have run a business in the past.
Understanding your staffing requirements and costs are important as well, since this is usually a high expense for a business. Make sure you do not hire employees until you need them and can support the expense in the business. In the early days, it will be expected that you run lean until you have the revenue to support adding staff. You do not want to forego service, but you do not want to pay employees who are standing around either.
Go To Market Strategy and Marketing Plan
You need to be able to define and articulate how you plan to go to market. How are you going to sell? Are you going to sell online, directly to a consumer or business, inside sales over the phone, through channels, or a combination of methods? How many sales people or channels do you plan to have? How many sales are possible in what period of time? How are you going to market to your customers and sales channels? How are you going to roll your product out? What is your pricing model? What are your margins? Do you have a clear message and branding? What is your marketing plan and are you spending enough on marketing to meet your forecasts you defined?
What level of competition exists already for your business idea? Are you competing against large companies or local businesses? It is important that the size of your potential market supports having the competition that exists for your business idea. If you are opening a store that sells similar products in an area that is saturated, it will be difficult for you to get the revenue you need to sustain your business?
You need to define and support your forecasts based on your target market, your pricing model, and your sales and marketing plans. Forecasting is guessing in a way as you can only estimate what you will make, but it needs to make sense. All of your parameters for building a forecast need to make sense. You need to have a way to make sales, have an adequate target market size, your sales cycle time needs to make sense, your number of sales/pricing needs to add up, and your sales/marketing plan needs to support obtaining the prospects to make the sales. If a banker or investor adds all of these up and finds there is no way to earn that amount of revenue in the time period defined, you will lose credibility.
You need to show that you have everything in place to support your business after you make a sale. Do you have the right systems, skills, and staffing? Do you have defined business processes? Are you a business that requires warranties, maintenance contracts and customer support? How do you plan to track your inventory and do you plan to have enough on hand? Operations differs by industry and business, but every business needs to show they can support and sustain customers after the sale.
Finally, you are going to have to show 3-5 year financial projections and just as with your forecasts, your business strategy needs to support your financials. You need not only understand your sales, but what your expenses are as well as your assets and liabilities. Can you show that you can make money in this business? When in your financials does it show that you will break even?
Not every business idea makes a viable and sustainable business. It is sad to see someone be passionate about an idea without thinking it through and determining the viability. Many times entrepreneurs will put up their house as collateral, use their children's post secondary education fund, or cash in their retirement to start a business based on an idea. It is important that someone is passionate about their idea, but it is more important that they have done their homework and determined the following before they take the plunge and invest their money and time in their business idea:
RK Fischer & Associates