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Brilliant or bankrupt? How to work out if your business idea is viable

September 15, 2014

With the enduring popularity of entrepreneurial TV shows, a lot of attention is paid to finding a great business idea by the media.

To work out if your idea is brilliant or will bankrupt you, there are four key questions to ask before you get started.

However, building a successful business has very little to do with having a great idea, and everything to do with excellent execution.

For many entrepreneurs and business owners, coming up with new business ideas is the least of their problems. Some even argue that business ideas alone are worthless!

Some people have ideas and spot new opportunities virtually every day. But in some ways, constantly spotting new ways to do something is hugely disruptive. You end up starting a lot of things and never really seeing them through.

Those people who make a big success of their business are the ones who understand how to analyse an idea for its potential, and then execute it in a way to generate maximum profit.

So, when you have that light bulb moment, and come up with a brilliant idea for a new business, the first thing to do is to stop and ask yourself these four questions;

1. Can you make a profit?

That sounds like a ridiculous question to ask. But you’d be surprised how many people start businesses where there is no chance of them ever making a profit.

For example, you might find that you can buy an item for 95p and sell it for £1. In theory you are making a profit. But once you take into account the costs of just being in business, never mind staff and premises, you can see that your profit margins will be squeezed pretty hard.

You need to ensure that whatever you do either has good profit margins to start with; or will benefit from economies of scale in the future (such as the ability to buy items cheaper in bulk when you sell significant amounts of them).

One other idea to consider is making profit through cross sells and up sells. For example many restaurants tend to make most of their profit on starters, deserts and drinks – yet no-one would want to eat there if they didn’t offer unprofitable main courses.

By the way, if you plan to just get started in business and “worry about making a profit later”, rethink your plans now. Businesses started purely on passion rarely last. Running a business can be hard enough – when you are working 70 hours a week and not making any money, you’ll soon find your passion slowly seeps away.

2. Will you make a profit?

Almost as important as whether you can make a profit is whether you will make a profit. This is about examining your marketplace to see what potential revenue there is out there, what your competitors are doing, and whether there are enough opportunities for you to grab market share.

Here’s an example of what we mean. You could look at, say, the market for selling toner cartridges for laser printers, and see that the profit margins per item are really high. But when you look at the number of retailers and internet businesses already selling them, you will see that the costs of acquiring a customer (out-marketing your competitors) are so high, that the profit margins are actually low.

New businesses rarely do well trying to break into established mature markets. You’re better off looking at new markets where there is a proven demand for the product or service, but the market is still open for one business to dominate. That’s your opportunity.

A strong USP will really help you to build a viable business. Read – How to develop a strong USP and how to use it to attract more and higher value customers to learn how you can use this key tool to improve your chances of success.

3. Is it scalable?

This is a particularly relevant question for anyone providing a service or selling themselves. Just because working on your own can turnover £50,000 a year, are you able to scale your business up as demand grows? If not you will have a problem generating significant profits in the years to come.

You may be brilliant at what you do and find it easy to fill your day with client work, but you may struggle to find staff who have the same talent and drive as you. That means there will come a point where you either have to lower the overall quality of the work the business provides as you grow, or cap the amount of work you do.

Beware of any business where you swap time for money. It will be hard – although not impossible – to scale it up and run it exactly as you would want it to operate.

4. Is it saleable?

This is the one question very few business owners ask when they start, but it is a really a vital one. As hard as it is to believe right now, there will come a point where you will have had enough of your business and will want to move on to something new.

Our article on why it’s vital you plan your exit before you start your business explains the importance of this issue in more detail.

If you have invested ten years of your life into a venture, what will you have to show for it? Can your business survive without you? If not, it is unlikely that you will have anything worth selling. Businesses that can be sold tend not to be reliant on one person; rather they use solid systems and replaceable employees to make a good profit.

As you examine your business idea, ask yourself if your business could ultimately be run by other people. Even if you never plan to sell it, you will at least build a profitable business that still allows you to take long holidays!

More help on starting a new business

You’ll find plenty of great articles on ByteStart to help you to start your own business. Some of our most popular are;