You have an amazing business idea, and have the capital to get it up and running. But here’s the deal: a good idea is not automatically a profitable idea. Most entrepreneurs learn that the hard way, wasting thousands of dollars and hours on something that looked far better on paper.
What went wrong? They didn’t think out the details: how much work it required, and how much they could earn from it. Weigh the pros and cons of each business idea by asking these important questions. Maybe you’ll find out that you have a potential goldmine—or at least, be look for a better idea that will be.
1. What will my profit margins be like?
You may get a lot of sales, but if your production costs are high you won’t get much of a profit margin. Plus, low profit margins mean that you’re vulnerable to any changes in the market or economy. What will you do if competitors slash their prices? You won’t be able to afford to offer discounts to your customers. Consider, also, what will happen to your profitability if suppliers raise their prices, or your equipment breaks down and needs to be replaced. If your net income is very minimal, you won’t be able adjust to these very plausible scenarios—and a good entrepreneur is prepared for anything.
Besides, a low profit margin begs the question: ‘Why bother?’ Imagine a man standing under Niagara falls, enduring the pressure and wild currents just to fill a tiny teacup. You’ll be investing so much of your time and resources, braving the stress of creating a start-up, to earn…how much?
2. How much will you earn per sale?
Yes, one of the biggest trends of 2010 is the popularity of the ‘dollar store’ and other bargain outlets. However, companies that get into these types of businesses make up for the small revenue per sale through volume. This takes a huge amount of investment, plus an excellent production and distribution system.
Smaller business start-ups thus have to weigh the pros and cons of competing on this level. Let’s assume that you have a small team and a simple production and distribution system. If you only earn a dollar per item, you’ll have to sell 10,000 items just to bring home $10,000—that’ll easily strain your resources, and you may fall into the trap of over-expanding before you really stabilize your market niche. However, if you’re selling a $1,000 product, you can put the same amount of time and effort into generating $1,000,000. The huge profit margin (see tip # 2) can also see your throw lean months, which all start-ups endure at one point.
3. How much control and exclusivity do you have over your product?
The problem with having a successful business start-up is that pretty soon other people realize that they can make money off the same idea. What if another company starts producing and selling your product? Do you have patents and copyrights? Or, do you have some unique access to an ingredient, or special production method, that your competitors will have difficulty copying?
Plus, consumers are willing to pay premium prices for something they see as special, innovative, or original. (Just think of Kentucky Fried Chicken’s ’11 secret herbs and spices.’) Another tip: market this unique selling point right away, so they associate it with you and only you. You may also need to negotiate exclusive contracts with suppliers, and work extra hard to protect the confidentiality of your production process.
4. What will my cash flow be like?
It’s funny, but true: there are a lot of companies that generate amazing sales but lose cash. The reason is poor cash flow: the money doesn’t come in when you need it.
While your business can survive (albeit by the skin of its teeth) it will not be able to grow. You won’t be able to seize opportunities, and if you don’t pay your own suppliers on time, you’ll also have trouble building relationships or negotiating for better payment schemes.
So, before you start a business, do a cash flow projection / analysis and see whether or not you’ll be able to collect your revenues and meet your operation costs at the right time.
5. What is the opportunity for growth?
When you start a business, you want to be in there for the long haul. Ideally, you can see the business growing—and that includes anticipating any potential plateaus and looking for ways to either expand your market or your services. For example, a restaurant will probably see a lot of traffic in the first months when everybody wants to try the ‘new place in town.’ But eventually the revenues will be controlled by the maximum seating capacity. How will you increase profit after that? Catering services? Corporate events on off-nights?