Karen (not her real name) had a "great idea” for a
business. For years she had made the
best oatmeal cookies. Family and
friends would attest to that. Now that
her children had grown up and she had time on her hands, she thought she would
turn those cookies into a business.
After doing some quick research on the Web, she learned her first step
would be to prepare a business plan.
She discovered a wealth of sites that offered information on preparing a
business plan and downloaded a template she thought would work for her
business. Over the next several months
she proceeded with her plans. Most of
her time was spent on researching a location for her store. But, she also spent a lot of time finding the best advertising deals, figuring
out a name and logo for her business, and all those other things you do when
planning a business. When Karen finally
came to me to ask for my advice, she had exhausted her savings on a business
that had yet to see any profit.
Karen forgot to ask the important questions.
there a market for what you intend to sell?
business must have customers who are willing to buy your products and
services. Unfortunately, many people
who start a business do so because they "believe” there is a market, (often
because their friends and relatives expressed enthusiasm about what they were
going to sell). Today, it is a
relatively simple thing to do a little research and analysis in order to obtain
a non-biased view about the wants and needs of customers in a particular market. This research and analysis can substantially
reduce the risk that your business won’t be able to find interested customers.
your business beat out the competition?
Whereas you may be able to find customers who would be interested in what you
have to sell, these customers must prefer what you offer to the goods and
services offered by the competition.
You must understand how customers view the goods and services that are
offered by your competition and whether or not they would prefer what
competitors offer to what your business will offer. If customers do not prefer what your business
will offer, your business won’t be able to generate sales. Again, you will need to do some research and analysis. However, your improved understanding of your
competition can substantially reduce the risk that customers will prefer to
purchase from the competition.
you beat the competition and still make a comfortable profit?
line, your business must be able to generate sales revenue that is sufficient
to cover the expense of running your business. Otherwise, your business will fail. Your estimates of revenue and expense need
to reflect more than just "wishful thinking”.
You will need to create estimates that are based on the data and
information that you have collected in your research concerning your customers
and competition. You will also want to
consider information you have discovered through your research concerning trends
in the markets you will be doing business in.
The computations you need are actually quite simple. In fact, you do not need all the
computations concerning cash flow or to follow the rigors of a formal
accounting statement that are typically part of a business plan. A simple calculation of estimated profits
that allows you to determine the break-even points is what you need. The break-even point will identify how many
customers your business must acquire for revenues to just cover costs, the
absolute minimal condition for staying in business.
need a Business Concept Evaluation
Only after you have answered the above three questions
in the affirmative, are you ready to start planning your business. The harsh truth is that if you can’t answer
these three questions in the affirmative, the business you have planned is
likely to fail and there isn’t any point to preparing a business plan.
So, your first step in planning a business is NOT to
prepare a business plan. It is to
determine whether or not you have an idea for a business that is likely to make
a profit. To determine whether or not
your business idea has profit potential requires a little research and analysis
but most of the data and information is available for free. In addition to checking for information on
the Internet, you will need to perform some primary research by talking to
likely customers and visiting the competition. You need to determine if enough customers can
be motivated to buy your products and services instead of those of the
competition. You then need to prepare
estimates of sales revenues that reflect the findings of your research.
In short, you need to perform an evaluation of your
business concept and answer the three tough questions I have listed above BEFORE
you plan your business. Otherwise, you
may find you are wasting your time planning a business that just can’t work.