End Goal: Determine whether or not this business is viable #
In this step, you need to put pen to paper and figure out whether this business can actually work. This step has several sub-steps within that you will need to follow. Also, you are just looking to do some quick math and basic research to make sure this business can work; do not get bogged down or overwhelmed. More detail will come later. Remember to be realistic. If you are conservative in your estimates and it still works then you should be on the right track. It is especially important to not forget TIME in this estimate as well. While people tend to focus on money during business planning, it is important to not forget time. You only have so many hours in the day and you want to spend some of that sleeping and doing leisure activities. Time is the most valuable commodity you have.
In Step 1, you narrowed your focus to really refine what kind of business you want. In Step 2, you became an expert on the ins and outs of your industry. In Step 3, you determined your market size. Your scaffolding is coming along nicely and you need to use all that information in this step.
Customers: #
You should know your market size and who your ideal customer is by now. Now, how can you reach them? In later steps, we describe in more detail what different marketing strategies there are. What you want to figure out now is how it would be possible to reach your target demographic. With the marvels of the internet, connecting to customers is much easier than ever before. You can find phone numbers and emails online if you are looking to work with other businesses. Google ad campaigns, youtube, tik tok, Instagram, and many other big name sites are all great for reaching consumers at a direct level.
What is going to be the best way to reach your customers and what kind of basic marketing campaign can you come up with now? Look into the costs of Google ad campaigns, think about the time it will take to create Instagram posts, Youtube videos, or any other outreach you may want. Also determine roughly how much time, effort, energy, and money will be needed to get your customers. Remember, it may be as simple as your business needs to show up and solicit or go door to door. Think about the factors involved including gas and travel time.
Vendors: #
If you need supplies to make your business work, how hard will it be to obtain those supplies? Are there many vendors for your supplies or only one specialty vendor? What happens if that specialty vendor goes out of business, can you still operate? What kind of negotiating power will you have with these vendors?
These are the questions you need to be asking now. Research who your vendors are and get some price lists if possible. Many vendors have price lists or quotes available for free
What type of software do you need and is the company providing it going to be around for a while?
Equipment: #
What kind of equipment do you need to start your business? It may be something simple like a desk and computer. If you need more equipment though, now is the time to source and get estimates. Quotes are always available to anyone who asks, don’t be afraid to reach out. Some quotes may only be good for 30 days, but that is ok, you are just looking for ballpark numbers now anyway.
Space is also important to consider with equipment. Where will you put all this stuff? Do you need an office, warehouse, or can you get it all done in your garage. Some of the best companies started in a garage so don’t be afraid to start small. You can also look into co-working spaces if your equipment needs are slim.
Legal & Regulatory: #
“What type of licenses and permits will I need to be compliant?” It is an important question to ask at this point. Are you able to achieve these now or do they require education, time, or money? Again, don’t be afraid to just call your city/county/state government and ask questions. Sometimes, they are rude, but more often than not they are extremely helpful. Tell them exactly what you are trying to do and figure out what all you need. You may need nothing or you may need complex certifications. Either way it is important to know now and have a plan to get any permits or licenses that are needed .
Examples: Sales tax permits, contractor licenses, general business licenses, etc.
Time: #
How long will it take you to make your product or complete your service? How much work can you do in one day? Go through the exercise. Even if you don’t have the equipment, act it out. Walk through all the steps and time yourself. How long does it take to do certain tasks and how much can you really do in a day? People often underestimate how long something will take and then are left scrambling to deliver what was promised.
This one will be tough to estimate so be extremely conservative in your estimates. Small business owners have a tendency to only focus on their businesses primary objective and they forget all the little things that may come with it. Phone calls, emails, and paperwork are just a few aspects to remember. It can become a nightmare of little tasks that detract from the main focus of your business, but it is stuff you have to do. You cannot realistically just do the main job, you have to factor in time for all the other parts of running a business. You may have a regular 9-5 while you are getting yourself off the ground as well to consider. So, be thorough in estimating how much time it takes to do the job, and don’t forget all the annoying tasks that go along with it.
Fixed vs. Variable Expenses: #
Now you need to calculate the projected costs for your business. You want to separate these costs into two categories: Fixed Costs and Variable Costs
Fixed costs are expenses that you have to pay each month no matter what. Mostly they should be the same month to month, but some may vary slightly. Examples of Fixed Costs are Rent, Utilities, Administrative costs, etc. Basically think of it as a monthly cash burn. Each month whether you make $1 or a million dollars you still have these basic monthly costs that remain relatively fixed.
Variable costs are expenses that change depending on how much business you do. These are typically your Cost of Goods Sold. Meaning the cost of providing the item to the customer. Example of Variable expenses are Raw Materials, Job Supplies, Commissions, Direct labor, etc.
You should be able to get a reasonable estimate at this point of what your monthly expenses may be and what your cost per item will be. Even if you are a service company and not providing a good, you may still have variable expenses. Things like travel, software fees, even often overlooked parts like file cabinet space, etc. can add up quickly. Do your best to reasonable estimate all of these costs and again do not be afraid to get out there and get some estimates or price lists if you need them.
Revenue Projection: #
This is the toughest part of the feasibility study. Determining the right price for your product will be difficult to estimate at first and likely will change over time. Use any information you can about your competitors or comparable products or services and do your best to estimate what you may be able to charge for your product/service.
Tips on Pricing: The price of a service can be a little arbitrary. Some value certain services over others. And while it is important to not undervalue yourself it is equally important to not price yourself out of the market. Typically, a service company will start off at a much lower price and then go up from there as they gain more business and don’t have enough time to take on all customers. Often, you will get to a point in a service industry where your price is too high for some customers and that is ok, but in the beginning it is mostly about filling up your entire day with work and getting more customers in the door.
For goods, you can frequently pinpoint a decently good starting point by just looking at competitors. There are a few good notes to keep in mind though.
You need to remember that if you are selling to a store, then that store has to have a markup to make money as well. Typically, stores will mark a product up 100%, some retailers do more or less, but that is a good benchmark for us. So, if the store wants to sell your item for $20 then that means you are only getting paid $10. Be sure to think about this when you are doing your pricing.
A final tip, this doesn’t work for all products especially those sold at higher volumes, you can use a simple 4x pricing mode for estimating purposes. This means that whatever the cost to make your product is, you should multiply it by 4 and that should be your sell price. (i.e. You make something for $5 then you charge $20 to your customers, four times the amount.). To break this down and why 4X is a good estimate is as follows: 25% goes to direct costs, 25% to overhead, 25% to taxes, and finally 25% is your profit. This is a simple way to think about whether your pricing is reasonable and works well for the purposes here.
Note that if you do your estimates and your costs exceed the potential profit you might generate, then you will need to go back to the drawing board and figure out where expenses can be cut or if you might be able to increase prices. It’s important to be realistic in your estimates.
Breakeven Analysis: #
Breakeven Point is how many units of product need to be sold in order for the company to cover all their fixed expenses, or better said, how many units must a company sell to make $0 in profit.
Breakeven Equation is
Fixed Costs / (Price Per Unit – Variable Cost Per Unit)
This equation gives us the number of units you need to sell to breakeven.
Fixed costs and variable costs you figured in part 6 and price per unit you estimated in part 7.
Example. A T-shirt company has $5,000 in fixed expenses. $1500 in rent, $500 in utilities, and $3000 paid to the office manager. Each shirt costs $5 to make and the company sells them for $20.
Fixed Costs ($5000) / (Price Per Unit ($20) – Variable Cost Per Unit ($5)) = Breakeven Point
$5,000 / ($20-$5) = $5,000 / $15 = 333.33
Which means you need to sell 334 T-Shirts each month to breakeven (You always need to round up because in this example, 333 would not be enough to cover the additional .33.)
Year over Year Projections: #
Use excel, sheets, or similar programs for this.
You want to estimate revenue and expenses that you expect to get within your first few years. You will continue to hear this, but BE REALISTIC. And again, you are only on the feasibility study portion, you will expand on financial analysis later on.
Do 24 months of monthly projections and then look at year 3, 4 & 5 in total.
Start with revenue. Be thoughtful in how many customers you expect to get in the first few months and then build slowly from there.
Then move on to variable expenses, also known as Cost of Goods Sold (COGS), these numbers should directly correlate to your sales numbers. The higher your sales, the higher your COGS.
Finally, add in your fixed expenses. These should remain flat and then jump up when you reach certain benchmarks as you are forced to expand. Bigger space means more rent and utilities, larger operations means you may need to bring in some indirect administrative salaries or other fixed costs. Be mindful of these increases.
The main question you are trying to determine in this step: Is this business possible? You should be able to answer that question now. If the quick numbers look good then you should continue to the next step. If something looks off, like the costs to enter are too high, or the regulatory hurdles are too much, then maybe you need to go in another direction. This step is not designed to deter you from your business, but to find where the cracks may form in your business and understand how to handle it.
A few other items to think about:
Sustainability: #
Is this business sustainable in the long run? Are the resources you will need replenishable or finite?
Availability of Labor: #
Can you hire the necessary people to help you or is their specific technical skills needed? Maybe you are just doing it yourself, which is fine, but that means scaling will be hard and you may be limited in what you can do.
Barriers to Entry: #
Some industries have very high barriers to entry. This means the cost to start a company in the space is too high, the technical considerations are too vast, regulatory concerns, or the market is just absolutely dominated by a few huge businesses. You need to be aware of any barriers to entry.
Legal Concerns: #
Make sure you know of any liability that your business may incur. If you’re selling food products and it makes people sick, you will be held responsible. Dangerous chemicals, unsafe workplaces, etc. Again, these are not reasons to stop you, but you need to be aware of anything and everything that could pose as a roadblock.
Consider Consultants: #
Many industries have consultants who are experts in their field. Often, people think of consultants as a shortcut to the end goal. It is not necessary, but it is not a terrible idea if you are dealing with a concern that could stop your business before it starts.
