Sunday, January 25, 2009

How Feasible is My Business Idea?

This is the first in a series of scenarios described to help you find where you are and how you might benefit from a little professional mentoring.

You just got laid off and you're thinking about starting your own business...
  1. But, you don't know if working for yourself is something that fits your personality
  2. You're not sure how feasible your business idea is.
  3. You may not have a clear business idea.
  4. How much will it cost?
  5. What? In this economy????
The first words that come to mind here for most people is Business Plan.
Let's take a step back and do a quick evaluation. Business plans can be very intimidating to the uninitiated and even the seasoned entrepreneur. It's true that this is one of the big elements of a business plan. Before starting that process, let's cover some basic questions to get your head in the right place.
Before I start this though, I'm going to tell you that there are many different formulas for many different kinds of businesses. The market place we're in is changing so quickly with the advent of the internet. These questions are just a starting point to head you in the right direction.

Let's assume you have a product, not service (we'll cover that later)
  • What can my product bring on the retail market?
  • Can I produce my product for one quarter of that price (excluding overhead)?
  • Will I or someone else make this product?
  • If I am to make this product, am I clear about the cost of my time to make it?
  • If someone else is to make this product, do you have a manufacturer in mind and know what their minimum orders are?
In the second point here, I'm covering something that I run through quickly when I look at any product. It's a fast calculation. This calculation doesn't include overhead because those are the elements that are ever changing in our marketplace right now: advertising, rent, etc.

The elements that are something that you can quantify now are materials and labor. We can assume a 100% markup of a retail product. So, that means you're going to charge the retailer half. If half of that again is the production of that product, does that mean the other half of that (one quarter of the final price) is my profit? No.

The other half of what you are payed for your product is your overhead: Everything that is not directly related to the production of your product.

This is where a lot of folks go astray: They think that if they are making this product themselves, they are saving on production. NO! You must pay yourself to make this product. If you don't, you will never be able to afford to pay anyone else to make it and therefore your business model is flawed.

The one place you can afford to push yourself here is in perhaps time spent marketing. In the beginning, when you are just finding your way, you can expect to spend way more time doing this than ever. It's okay to "over-spend" this time. You just can't over-spend your production time.
If you are over-spending on your production time, perhaps you didn't spend enough time on R&D (research and development). Take the time then and figure out how you can make it faster, better. That is time well spent. VERY well spent.

Next, we'll step up to the same question from a services perspective!

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