Charles Dickens’ character Mr Micawber in David Copperfield clearly understood the essentials of viability: “Annual income twenty pounds, annual expenditure nineteen (pounds) nineteen (shillings) and six (pence), result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”.
Establishing the viability of your business idea is straightforward.
Step 1 is to answer these questions:
- How big is the market – how many potential customers?
- How many of these will actually buy your product or service?
- How often?
- How much will they pay?
- How many will they buy at that price?
- What does it cost you to make your product or deliver your service?
- What other costs (including your own salary) must you cover?
If you estimate one year’s sales and costs, will this result in a profit (sales greater than costs = happiness) or a loss (costs greater than sales = misery)?
A loss-making business is not viable – unless the loss can be turned into profits somehow in later years.
Step 2 is to compare your profit (if any) from Step 1 against the initial investment required to get your business started. The faster you can pay back your initial investment, the more viable your business.
Advance orders help secure the viability of business by providing confidence about early sales – and about your ability to make sales.
Use the Business Viability Worksheet to check the viability of your business.
All is not lost if this exercise suggests that your business is not viable. Re-examine your assumptions – about the market, your customers, your competition, your product or service, your pricing, your costs (production and operating) and your initial investment – to see what changes can be made and what effect these have. Often a simple change can have a dramatic impact on viability.
Your next step is to begin the process of business planning – as distinct from writing a business plan (which comes when you have finished the planning exercise).
Your planning involves four steps:
- In the first, you can dream – of your business as you would like it to be. Don’t let constraints of finance or skills hold you back – dream BIG!
Then research what you need to do to make that dream come true. You will find that some parts of your dream are easily achievable, while others are more challenging – and yet others appear virtually impossible (in fact, they actually may be impossible!). Work through what needs to be done – how – when – by whom – with what resources. Accept that you might not achieve it all – but do your best.
Next, test. Check that your idea will work in practice. That’s what business planning is about – a bit like a flight simulator where you can make your mistakes with no consequences. If it doesn’t work (and it probably won’t first time!), work out what went wrong and fix it – then try again. Keep trying and fixing until you are confident that it will work.
Last, document all this thinking and researching and testing in a formal business plan.