Coming up with business ideas is, for many people, easy. Daydreaming about how to make money from your favourite hobby and make a living from your sofa is a fun way to pass the way, and many of those ideas look, at first sight, viable. Other people see self-employment as a way of getting back to work after being laid off or leaving the workforce for personal reasons. However, if you want to avoid disappointment and financial loses it’s important to know how to evaluate the economic potential and viability of a business idea.
Calculating potential revenue and income
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The first thing you need to do to evaluate the potential of a business idea is looking at how much revenue it can produce. Take your idea, and how you expect to make money from it, and add up the expected income you can make per sale, and how many sales you can make in a month. Add your costs as well, so you are left with only a rough approximation of your net income. Be realistic, even pessimistic. It’s easy to overestimate how much money you can make when you are looking forward to starting your own business. Do the numbers add up, or are they too low to be a full time job?
How many clients do you need to be profitable?
Once you know how much money you can make out of a sale (be it a product sale or a project) minus how much it costs you to actually deliver it, you can approximate how many of them do you need to make a living and compare it with the size of your target market and how much of that target market can you exploit. For example, if you choose to start a consultancy business but you set your rates too low and you need 50 clients per month, chances are you’ll never be profitable or it will take too long. You will need either higher rates or changing your business model, for example becoming an online only business consultancy instead.
A lot of competition on your chosen niche is not a bad thing per-se. It means that your business idea is good enough that other people are already making money of it. What matters more is if you can beat enough of those competitors to get enough sales to fulfil your business objectives. You don’t need to be the best, but you need to be good enough and offer something unique to your clients that allows you to grab a decent share of the market. If the market had room only for the best there wouldn’t be online shops besides Amazon and Ebay! Be very wary of a niche that has no competitors, because it often means that people already tried, and it failed to sell enough. Unless you have the resources to develop a totally unique product, and create awareness for it so you have customers, which is often difficult on a small business budget.
Use a business plan to get a second opinion
One of the best ways of assessing the viability of a business idea is to write a good business plan and head to your nearest small business trading association offering free mentoring. Just writing your business plan will help you see things more clearly, and you’ll be forced to look at numbers backing your business idea, from your realistic audience size and market share to your competitors or your first year’s budget. A business plan will be a requirement if you want to get money to start your own business, and getting a professional mentor to read it can make all the difference between a good business idea and a very profitable one.
Start Small and Release Often
The best way to know if your business idea has potential is to launch it as the smallest piece of functionality you can develop that still makes sense. You can try a limited product run, a preorder system or a crowdsourcing platform to assess how many people are actually willing to part with their money to buy your product. Or if you are talking about a digital product or service, then try to bootstrap it and release a beta version with the core features. This is the best way to decide if a business idea has potential and prove it to potential investors or to a bank if you choose to finance that way.