After identifying a potential business opportunity, you need to analyze the situation carefully to judge its plausibility as a successful enterprise. Whether you’re looking to invest as a silent partner or planning to manage the project yourself, careful assessment is needed before committing time, energy or resources.
These six steps will help you to determine if you have a winning idea or prevent you from investing in an inappropriate or flawed project.
Define the Product/Service
Identify the product or service that the business would provide and analyze its worth to any potential customers. What problem does it solve? Are other companies doing it? If your product or service is a solution to a tangible need of the prospective customer, the business may have real potential. Here are some home-based businesses you could consider launching part-time at first and then move to full-time. Alternatively, the best business opportunities offer a service that isn’t being provided by many other competing entities.
Analyze the product or service and judge it for quality and viability. The best products are cheap and efficient to produce while being simple to provide for customers. The more efficiently you can provide the service, the better an opportunity it may represent.
Conduct Market Research
Once you’ve judged the product to be worthy of further consideration, you need to analyze the market in which it would be launched. A healthy market consists of high demand and minimal supply. The perfect market rarely exists but launching a service in a completely incompatible one could spell disaster for your business. Conduct market research to gauge the current supply and demand for similar products.
Any suppliers currently operating in the market represent competition and could significantly infringe upon your share of total revenue. If there aren’t any competing businesses operating in your market, it might represent a lack of demand for the product, so assess the relevant community to gauge interest.
Having identified a viable product and a healthy market, it’s now time to start formulating a basic business plan. Outline possible strategies for developing and launching the product from start to finish. The plans don’t have to be extensively detailed, but they should take into consideration every aspect of the organizational and operational structure of the business.
The plan will likely change if you invest in the opportunity, but the process will enable you to consider facets of the enterprise that you might have previously overlooked. Creating a temporary business plan often highlights practical challenges or inefficiencies that may prove to be serious stumbling blocks in your route to profitability.
Model the Finances
Once you start to get a more rounded view of what a particular opportunity entails, you can start to consider the more intricate financial implications of the enterprise. Create a detailed forecast of the costs involved in developing the business. Consider every known expense and err on the side of caution when calculating expected revenue and expenditure.
If your own finances don’t meet the predicted requirements of making the business successful, then the opportunity is obviously not a viable option. Analyze every possible revenue stream the opportunity presents and consider whether it’s financially sensible to commit your own resources to make the business work.
The people running the business hold the key to its success or its failure. Consider how many people you will require to manage the enterprise successfully and whether they would need any particular skills or knowledge to do the job. Experienced staff members can naturally demand higher payment so your costs will be directly affected if the delivery of your product or service relies on your staff possessing a particular set of skills.
Not employing enough staff may save you money in the short term but it will almost certainly cost money in the long term by negatively impacting your ability to operate efficiently. Calculate the number of people you would need to employ to run your business to its highest standard and ensure you have enough capital to pay them all for the duration of their respective contracts.
Once you’ve outlined the key organizational structure and financial demands of the business opportunity, you can start to calculate your likely return on investment. Consider the time-frame you want to operate within and set yourself a considered and conservative estimate on expected financial returns. Identify key performance indicators and define policies and practices that would enable you to closely monitor your fiscal performance.
By knowing how much money you can reasonably expect to make from your business opportunity, you can determine your margins for error and levels of acceptable risk. Take your personal financial situation into account and calculate a defined amount of loss that you or your company could absorb in the short-term. If you judge the margin between your predicted revenue and your acceptable amount of loss to be too narrow, the reward may not be worth the risk of investing.
The excitement that accompanies a new business opportunity can cloud the brain and cause even experienced investors to make unwise decisions. Having a six-step process to follow minimizes the subjectivity involved in business analysis and facilitates more informed and logical business decisions.