Check that your business idea will work

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Although the only real way to find out if your business idea will work is to actually start your business, there are a number of things you can do to help research your business idea before you take the leap.

Working through this process methodically will give you a better sense of your businesses chance of success .

Reality Check 1

Have a key competitive advantage

Your business ideally needs to stand out from the competition. If your business has a unique selling point (USP) or competitive advantage, it will give customers a reason to go to you, rather than anyone else. Businesses which do not have a clear and strong USP, often have to resort to competing on price. This typically means lower profit margins.

Consider basing your competitive advantage on something the customer values. For example:

• First to the market and no one else sells what you do.
• Being the most reliable with the best guarantee.
• Having exclusive products or a contract so you are the only supplier.
• You have the best quality or longest warranty.
• Having a cost advantage so you can be the cheapest yet still make a profit.
• Being the healthiest or most sustainable.
• Knowing more than anyone else and being an expert
• Being made in Hawaii.
• Organic or use recycled materials.

Reality Check 2

Research your target market

It makes sense to ask the people you’re likely to be selling to, what they think of your business idea. Try and find out:

• Whether people actually want what you’re selling.
• Which people or businesses are most likely to buy.
• Which group of customers are likely to be the most profitable.
• What prices you could charge for your products or services.
• How often people will buy.
• The benefits that people want to receive when they buy your type of product.
• What needs people have which are currently not being met by any other businesses.
• The best ways to market to potential customers.
• Where people currently buy from and why they choose to support those businesses.

Much of this information can also be used to determine whether there will be sufficient demand for your business’s products and services for your business idea to work. It can also be used to figure out how you can modify your original idea so it will be viable, perhaps by identifying ‘gaps’ in the market.

Test the market

Trial marketing can be one of the most reliable ways to test your market potential. If you are introducing a new product or service, you could:

• Set up the business part-time while still working.
• Test the response by selling at trade fairs, weekend markets or short-term contracts, depending on the type of business you’re running.
• Launch a limited marketing campaign in a selected town or area.

Reality Check 3

Make sure your business model will work

It’s relatively simple to determine whether you can sell enough to make a profit, but can you physically make enough?

For example selling a product which takes four hours to build, means you have a capacity of two a day (around ten a week or five hundred a year). Is this enough to make a profit from the price you’re selling them for? If you’re a retailer then calculate how many people you need per day spending the average amount for a customer in your type of business. Is the business viable?

Conduct a break-even analysis to show the minimum amount of sales that your business needs to make in order to cover all of your costs. Then work it out again, this time with your profit margin added in. If you can make at least this amount of sales, the idea may be financially feasible (assuming you can still get customers of course).

Reality Check 4

Do you have the money

Calculate how much money you need, and how much money you have. If there is a gap then you’ll need to cover this amount somehow. It's common for some business owners to underestimate the actual amount of money needed to start up a new business venture.

Step 1

Add up all the purchases you’ll have to make to get your business up and running. Some of these costs could include:

• Vehicles, plant equipment and machinery.
• Office equipment, computers, scanners, desks.
• Initial inventory or raw materials.
• Fees for licenses or permits.
• Any staff you need in advance before the doors open.
• Your own salary (if you intend to take one).
• Internet, online, website build.
• Product or service development.

Step 2

Once you’ve determined all your set-up costs calculate your ‘working capital’, which is how much you’ll think you need to cover all your running costs until you start to make a profit.

Examples of these on-going costs include:

• Rent, power, internet.
• Accounting fees, insurance, bank fees.
• Salaries or wages, any sub-contractor costs.
• Online subscription fees, communications.
• Anything that is a regular cost regardless of sales.

For example if these costs totalled $20,000 a month, and you’ll think you need at least 6 months until the business can pay its own way, then you’d need $120,000 in working capital.

Step 3

Add the set-up costs to your working capital costs to get a final start-up estimate.

Do you have enough money saved, borrowed or accessed from somewhere to cover this amount?

Summary

Your business is much more likely to succeed if you can pass these initial four reality checks. Sure, there are still hurdles to cross, such as accurate pricing, finding a location, being able to find customers and building a sustainable revenue stream.

Next steps

• Allow some time after you have collected all your research. Ask yourself if you want to proceed.
• Talk to a business advisor or another small business owner about your idea, and collect as much feedback as you can. Though the final decision is yours.
• If your information points to a viable business, you feel confident in your entrepreneurial abilities, and you want to move ahead, then your next step is to write up a proper business plan.

Decide how much money you need to start

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Many new businesses need start-up capital. Find out the main options of raising funding for your new business.

Before you start a business, it’s best to know how much money it will cost and make sure you have access to sufficient capital. It’s important to be realistic with all of your figures, and to estimate costs and revenue as accurately as possible so you can calculate how much you need.

How much money do you need?

1. Set-up costs (money you’ll need before you start operating).
2. Initial working capital (money you’ll need to run the business until you start making a profit).

Set-up costs

• A web designer would have low costs: a computer, software, possibly liability insurance and any legal costs setting up a company.
• A builder would have higher costs: tools, vehicle, and equipment for any specialized work.
• A restaurant’s set-up costs may include kitchen equipment, seating and initial food ingredients.

• Rent deposits and any building renovations before you open for business.
• Licenses and permits.
• Employee recruitment and training.
• Initial inventory or raw materials.
• Signage, marketing materials, web site development and advertising.

Working capital

Once they open, many businesses don’t have enough sales revenue to cover overhead costs. Time is needed to start and generate customers to cover all the overhead (and make a profit). Until this happens you’ll ideally have spare cash in the bank (also called “working capital”), to pay for monthly expenses until sales can cover all your monthly costs.

Work this out:

• Begin by estimating your monthly costs (wages, utilities, internet, advertising, rent – everything). This will give you a monthly amount you need as a minimum to stay in business.
• Transfer these totals to a cash-flow template.
• Now add your sales estimates for the first six months (being realistic and remember some businesses don’t have any sales initially). Each month you’ll see how much working capital you are short.
• If you have customers on credit or account, they rarely pay on time. Factor into your calculations that you may need to wait 30, 60 or 90 days for payment.

Cost out every item and get quotes

You can get accurate figures for set-up costs and working capital expenses by rolling up your sleeves and carefully researching all costs.

• Get written quotes from suppliers for each service or product you need to run your business. Ask them to guarantee the quoted price for at least 90 days; that way, you won’t have any surprises when you go to start-up your business.
• If you are leasing or buying premises and must pay for utilities, contact the utility company to find out the monthly cost. Ask about any anticipated rate changes.
• Research online or contact vendors directly to identify costs for office supplies, internet access, telephone charges, furniture, alarm systems, data storage and office cleaning.
• Include any transportation or travel costs you may incur to get your business going.

Contingency budget

It can be difficult to foresee all the costs you will incur to get your business up and running. Inevitably, there will be some costs that you didn’t expect, or purchases that simply end up costing more money than your earlier estimate. Costs can also change if there is a substantial period between when you priced something out and when you buy it – an insurance rate obtained last year may be much higher this year because of changes in the marketplace.

You can accommodate changes to your start-up budget by including a contingency budget. Consider adding ten to twenty percent or more to your start-up budget for unexpected set-up expenses or changes to your working capital needs.

Start-up budget formula

Use this formula to safely calculate the amount of money you’ll need to start your business:

• Set-up costs + working capital costs (monthly costs x the number of months you’ll be short) + a contingency budget.
• Example: Start-up costs $200,000 + working capital $120,000 ($20,000/month x 6 months) = $320,000 to start and cover costs for 6 months. Add a 10% contingency to be safe which totals $352,000.

Take this total and calculate where this will come from:

• Personal savings.
• Bank finance.
• Investors.
• Government grants.
• Loan from friends or family.

Summary

Work out exactly how much you think you’ll need to start, with a realistic contingency to cover any cost blow outs. Remember to make a plan to pay for your personal living expenses while your business gets off the ground because if it won’t be able to pay you a salary initially. Figure out your household expenses to know exactly how much you’ll need each month.

You may have all the cash you need for starting a business. If not, then carefully consider all the options available to secure start-up funds.

Next steps

• Contact one of our friendly Business Relationship Managers to see how we can help your business.
• Conduct your market research carefully to determine how much money your customers will be willing to pay you. This helps to accurately forecast sales revenue.
• Explore government grants for small business owners in Hawaii.
• Contact the Small Business Administration Hawaii District Office for help to get your business up and running.

Building Competitive Advantage

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Identifying your competitive advantage

A competitive advantage is what your business does better than others. The smarter you can be about developing and promoting your competitive advantage, the better placed your business will be to succeed. The most common competitive advantages are:

• Low pricing: You’re able to supply the lowest-cost product.
• Specialization: You service a specific niche market better than other businesses.  
• Differentiation: You have the same product or service as others, but you deliver it a different way.

However there are a number of other ways to build a viable competitive advantage, especially when everyone in the same industry has similar prices, products and services.

Eight ways to build

1. Promote your staff

One of your best competitive advantages is your staff. The advantage of having friendly, knowledgeable, proactive staff shouldn’t be underestimated. The key is to make sure your staff are motivated, trained and successful. Help your staff by:

• Establishing clear performance standards.
• Starting incentive or bonus programs to reward staff for their successes.
• Encouraging employees to develop their product or service knowledge and paying for training.
• Learning what other great companies do and adopt any ideas that are relevant to your business.

2. Use your location

Be where your customers are located. For example, if you are a retailer and you don’t have a location that attracts foot traffic, you’ll be short of customers. You should also consider:

• Retail and customer location trends and whether you need to, relocate.
• Marketing your business with business-to-business accounts, free pick-up and delivery, drop-off points or wholesaling through other businesses with better locations.
• Encouraging customer interaction, such as via online communities, attending conferences or exhibiting at events.

3. Offer unique or exclusive products

You have an advantage if you can source products or deliver services that the competition cannot. If you’re competing against larger or similar businesses, establish a reputation for unique products. For example:

• Seek exclusive agreements with suppliers.
• Look overseas to find products or a brand that other businesses don’t carry.
• Find a location, contract, service, agreement or tender that only your business can deliver.

4. Have a great website

A website that is more attractive and easy to navigate than your competitors can be a distinct advantage. Can you create a better, easier online shopping experience? Here are things to consider:

• Focus on great design.
• Be aware of how search engines rank sites and be on the top.
• Use content marketing, such as guides, whitepapers or giveaways to build expertise and to have potential customers make contact.
• Use new technologies and marketing automation to gather, nurture and close any new leads.

5. Become a star

Your own image can be a competitive advantage. No one else has quite your mix of skills, and you can build a character owner image by having your name on as many materials as possible, including:

• Having your name or face associated with the business.
• Speaking at conferences as an expert.
• Becoming prominent in your community by volunteering on local boards.
• Becoming an authority in your field and a spokesperson for your industry.

6. Get to know your suppliers

Being on good terms with your suppliers and their sales representatives is an often-overlooked competitive advantage. You might find that they do most of the market research, develop new products, conduct customer analysis and provide nation-wide branding and advertising that enhances your credibility. A good relationship could provide:

• Better service and support. You might get promotional material, displays and signs or training for your staff in advance of everyone else.
• Better supply and faster delivery.
• Better return policy and customer support.

7. Form strategic alliances and joint ventures

One of the best ways to compete against other businesses is to form alliances and joint ventures. For example, by banding together with other businesses in your industry, you can often gain better group discounts from suppliers than you would if you ordered on your own. Joint venture marketing is another way of sharing advertising costs. By joining together with businesses from the same location, or same industry group you can help increase demand for the industry as a whole.

8. Deliver speed

People increasingly want quick service, so the faster you can deliver your product or service the better. Hold regular staff meetings on how to streamline your business processes and fulfill or exceed customer requirements without sacrificing quality of delivery.

Next steps

• Contact one of our Business Relationship Managers to see how we can help your business grow.
• Find out what your business does well.
• List your key competitors and outline what specifically you’ll do to challenge them.
• Always look for new competitive advantages. Go to conferences, research online, and look at what other industries are doing.

BUSINESS LOAN CALCULATOR

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If you need to borrow money, this calculator will estimate the cost of repayments for a business loan.

Note: Results are based solely on the information you have provided; product may not be available for all terms entered. These calculations are provided for illustrative purposes only and do not reflect any additional costs. This is not a credit decision or a commitment to lend. Please contact an experienced loan consultant for more accurate and detailed information.

BREAKEVEN CALCULATOR

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Calculating the breakeven point of your products is an important part of testing the feasibility of your business. Use this calculator to experiment with pricing, costs and time to find a combination that gives you the most viable solution.

If you know your overhead and the cost of production, you'll be able to work out how many products or services you need to sell to breakeven.

Darrell Avery, CRPC^®

Vice President, Financial Advisor

 

American Savings Investment Services

Phone: (808) 541-8634 
darrell.avery@asbinvestments.com 
Branches served: Ewa, Kalihi and Waipahu

Darrell has worked as a Financial Advisor since 1994 and has a Chartered Retirement Planning Counsel (CRPC) designation. He holds Series 24, 7, 64, and 65 securities registrations as well as Life, Accident and Health Insurance Licenses. 

He enjoys dirt biking, stand up paddle boarding, and golfing in his free time. Darrell is an active member of Mililani Basketball Association.

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