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Three Questions You Should Ask Before Planning A Business

Posted By Cheryl D. Gracie, Wednesday, March 10, 2010
Updated: Wednesday, December 3, 2014

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.

1. Is there a market for what you intend to sell?
Your 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.

2. Can 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.

3. Can you beat the competition and still make a comfortable profit?
Bottom 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.

You 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.

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