Checking the viability of your idea.
Before you go into business you need to determine if there is demand for your product, and at a price that ensures your business will be sustainable.
Your starting point.
It makes sense to assess if your business idea is viable before you invest too much time and money in it. While there's no way to guarantee your idea will succeed, thorough market research will reveal if the time and effort you'll invest in a business venture has a good chance of offering a reasonable return on investment.
Can you answer yes to the following questions? If so, there is a good chance your business idea is viable.
- Do you have a unique selling point?
- Are there people who will want what you will have to sell?
- Are there enough people who will want what you have to sell, at the price you will set?
- Do you have enough money to last until your business is profitable?
Do you have a selling point?
Sometimes a new business will be lucky to find a gap in the market - you might be the only mechanic in town, for example. But most of the time, your product or service will have to compete against similar products or services for customers and market share.
This is why your business needs to stand out from the competition - your unique selling point (USP) is what will encourage customers to buy from you.
Your offering might be:
- Cheaper or more economical to use
- Better designed and easier to use
- Locally made with ethically sourced ingredients or components
- More environmentally friendly or cruelty free
- Weigh less, or be made of better material.
A USP is anything that makes what you offer better than similar products on the market. If you have a USP, it's worth further researching the viability of your business.
With so many businesses online nowadays and customers able to shop anywhere in the world, USPs are getting harder to maintain. However, it's possible to have a business USP even if you don't have a product or service USP.
Examples of business USPs can be your experience and expertise, having contracts in place with the best, most reliable supplier, or simply having the most convenient location.
Do you have a market?
Determining who your potential customers are and how many of them are in your area are crucial ingredients to business success.
Once you establish this, the next step is to ensure your market, whether it be teenagers, business people or retirees, will be interested in your offering, at the price you'll need to charge to run a sustainable business. In addition, consider whether you'll be able to sell your product or service more than once to the same customers, or whether you'll need a steady stream of new customers to make one-off sales to.
Who are your competitors?
Knowing who your potential competitors are is an important part of market research. You need to know their USPs, weaknesses, pricing and marketing strategies.
- Does your product or service really fill a need not already being met by the competition?
- Will your business be able to take a large enough share of the market to break even and start making a profit?
If you're still answering yes, then it's time to crunch some numbers.
Do the numbers add up?
Consider the following:
- What will it cost you to produce the goods or provide the service?
- What is your selling price?
- How much demand do you anticipate?
Download Westpac's cash flow forecast1 to help you get clear on your anticipated costs and feasible selling prices. It's always a good idea to do a cash flow forecast for best-case and worst-case scenarios.
Also consider the return on investment you will get once your business is established. You want to be well compensated for your time, investment and effort.
Do you have enough money to last?
The last question to consider is whether you have enough money available to cover the costs of starting up and running the business until it is making a profit.
- How long might it take to build up your sales to the point that your business is breaking even?
- How long before your business starts to generate a profit?
Revisit your cash flow forecast and don't forget to include expenses that can be easy to overlook, such as insurance, loan interest repayments, and marketing. You'll need to be able to cover your operational costs and personal expenses until you break even or turn a profit, and this could take several months.
If you've come this far in your planning, chances are you have a viable business idea.
Things you should know.
1 These tools are intended as a guide only and are not intended to constitute financial advice.
The material on this webpage is provided for information purposes only and is not a recommendation or opinion. We recommend you seek independent legal, financial and/or tax advice.