3 Steps to Business Idea Evaluation

In the last post, I spoke about evaluating a business idea to determine whether it's the next Pet Rock, or sinking like a rock.

There are 3 basic steps for determining top-level viability. You want to determine if this idea is reasonable before you spend months of time and potentially lots of money. There's no sense doing all that extensive research, building relationships with potential partners, and spending money on anything, if in the end, the financial results don't meet your needs.  This is not a complete business or marketing plan. Don't go saying that Chris said this is all you have to do. I'm not saying that at all. It's merely a first round go/no-go evaluation. It's the first of many before you decide to launch a business. 

These are the basic steps:

1. Understand the Market
2. Consider your Marketing Strategy
3. Calculate the Profitability & Cash Flow

If the profitability and cash flow don't meet you needs, go back and modify the business model and see what affect that has. If you can't achieve the level of financial success that you want, then abandon the idea and move on the the next one. 

So these are the area's you'll evaluate, but what questions, specifically, are you trying to answer?

1. Market: Are there enough potential customers in the market?
2. Marketing Strategy: How will you convince those potential customers to buy from you?
3. Financials: Do the profitability and cash flow results meet your needs?

If the answers to these questions support your goals, then keep going to the next step. As you continue learning new information that changes anything significant piece of the evaluation, then run the three step process again. Keep moving forward with your research and evaluation, partnership building and business plan writing as long as the three questions continue giving you answers that meet your needs. 


Connect with Chris on  Google+  LinkedIn  Twitter 

How to Evaluate a Business Idea

You've got a great idea for a business, well, you think it's good anyway. How do you know? How do you evaluate a business idea and when in the evaluation process do you decide whether to move forward or ditch the idea and look for another opportunity?

I work the idea viability analysis as a continuous pass-fail process. What I mean by that is I continually evaluate the idea and make it pass, or move on. For folks who are looking, there are way more ideas than time to evaluate them. So it's important to be honest with yourself and pass on everything that doesn't meet your evaluation criteria or your needs.

When evaluating a business idea, start by doing a little research. Understand the market, how business is conducted, and the competition. Consider how the current trends in the industry will affect how business is done in the future. Identify your target customer and determine if the market is large enough to support another competitor of your size. 

Next, think about how you will position your company and products in the market. Determine how much budget you'll need to accomplish your revenue goals and create a basic marketing strategy.

Now comes the hard part. Based on your preliminary research and marketing strategy, how many units of revenue do you expect to achieve? Create a sales projection for a couple of years, by month. Yes, I realize that anything past about 3 or 4 months is a guess, but at least it's an educated guess. You need to understand the profitability and cash flow model in order to evaluate the idea. So, give it your best guess. Make sure to consider how normal industry or seasonal cycles will affect your projections. Don't take a yearly projection and divide it by 12. Think about what the revenue will look like each month. 

The rest is just math. How big an organization is needed to support a business with that revenue level? Subtract the cost of generating that kind of revenue, subtract it from the net sales to get gross margin. Then, subtract operating expenses to determine net income. Next, figure out the cash flow implications. If everything seems to make sense, then continue with your evaluation. If not, abandon the idea and move on.

This is a quick and dirty top level evaluation to determine whether to move forward with an idea. It's not a business plan. It's not a full-fledged marketing plan. It's just a go/no-go first evaluation, before you spend weeks or months working out the details, forming the partnerships and spending money building a business idea into a company. 

If you need help evaluating your great idea, give us a call.

Connect with Chris on  Google+  LinkedIn  Twitter