How to Do A Small Business Feasibility
Study
By Tom Egelhoff
 Starting a small business in a small town
is much different from a big city. Simply because of the sheer
numbers in big cities you can make a lot more mistakes in your
business than you can with a small town.
For example, let's suppose you have a passion for oriental
rugs. You are a legitimate expert on these rugs and want to open
a shop to sell them. In a large city there may be enough customers
in your selling area to make the store profitable. In a small
town, however, there may not be enough to make it profitable.
So, how do you know if your business idea will work?
The starting
point: look at yourself
The first thing you will need to do to make your dream happen
is to do a feasibility study to see if your business will work.
In this article I'll talk about how to do just that.
If you haven't done a business plan yet, that's the place
to start. You can get free assistance in developing a business
and marketing plan from your local SCORE
office or the Small Business
Development Center. As part of the executive summary
in your business plan and again in the marketing sections you
are going to answer the following questions.
Are you really qualified to do this kind of business? Do you
or someone else in the business have the expertise to make it
successful? Do you know what it's going to take to own and run
your own business? Are you an entrepreneur? (See:
Small Town Entrepreneurship: Have You Got What It Takes?)
Are you a people person? Some of us love what we do but have
great difficulty in talking to others about it. In a small town
business you are going to have to be able to sell. Now before
you stop reading right now because of your fears, let me define
the kind of selling you must do.
Have you ever recommend a movie to a friend? That is a basic
form of selling. You might ask your friend what kinds of movies
they enjoy. You would tell them why you liked the movie. The
stars, the story line, and how much you enjoyed it. If you can
do than then -- guess what?-- you can sell. For more on selling
-- (See
Chapter Four: Step Three in your copy of "How To Market,
Advertise And Promote Your Business Or Service In A Small Town")
How Do You Compare?
In order for any business to succeed only one thing must happen.
You must make enough sales that produce enough profit to pay
all expenses, make a profit and pay your salary every month.
One of the first things to look for here is.. who else is
doing what you're doing? This is sometimes called a Comparative
Competitive Analysis.
Is there a perception that your competitor's are good at it?
Notice I didn't ask, "Are they good at it?"
I asked is there a perception they are good at it. The
two statements are vastly different.
If you compare a competitor to your business the competitor
may come up short in your eyes. The reason is that you are only
looking at features of each business. I deliver, they deliver
so both businesses are equal. Customers don't buy features they
buy benefits.
Customers buy based on emotion. (See:
Why Customers Buy) As a result, an evaluation like the
one described above, of the competition based on features of
both businesses may not be accurate. Here's why: If both businesses
are equal -- what benefit is there for the customer to change
and do business with you?
An older business is always going to have a small advantage
over a new business. An older business has a track record a new
business does not. A new business must create it's own perception
of how it will fill existing customer needs -- to the customer's
perceived benefit -- than the customer's current business.
Is there a market for your business?
There are only two ways to get customers. You must create
them from people who were never customers before. An example
might be kids turning 16 and getting a drivers license are now
gasoline customers who never were before.
The second way is taking them away from the competition. Every
day someone has an unhappy experience with a business and they
change to the competition. Here are some ways to determine which
category your business might fit into.
- Target Market Analysis
- You won't have a business without customers. You must know
who the people most likely to want your products or services
are and how to reach them. Their age? Occupation? Marital status?
Household income? What TV shows do they watch? What newspapers
do they read? Where can you put your message where they are most
likely to see and react to it?
- Sales and Market Share
Analysis: How much of the market do they have and
how much do you need to be profitable? Either create new customers
or steal them from your competitors.
- Product Awareness and
Attitudes: Do people need to be educated on the use
of your product? Do new buyers have to be educated when they
buy a computer? Are they concerned that your product might be
dangerous or harmful?
- Purchase Rates and
Buying Habits: Is your product or service seasonal?
In Bozeman, MT ski businesses make money in the winter while
bicycle shops thrive in the summer. When do people want your
product?
Can you do it financially?
As mentioned above the business must produce income to survive.
I keep hearing how great Amazon.Com is doing but I also hear
they are not making a profit after several years in business.
How do they do that? Accounting.
The best advice I could possibly give you in starting a business
is to sit down with an "experienced" accountant and
have them help you design a financial plan. Where and how you
handle money can make the difference between success and failure
for many new businesses. You may say, "Well I'm just a home
based business and won't make a lot of money for a while."
That may be true but at least have the accountant set up the
"tax categories" for you. You are going to have to
pay taxes on any income produced in your business. How well you
keep records will determine the amount of taxes or allowed deductions
you can take on your business taxes. (See:
Self-Analysis For Going Into Business)
Your accountant can also be of assistance in preparing the
financials for your business plan. You may feel you don't need
a business plan because you aren't going to run right down to
the bank and get a loan. The reason for the business plan is
to keep your business goals on track.
What do you have to do to break-even?
How much business will you have to do to make your business
a success? That would be a break-even analysis. Rather than rehash
something that's already done.. (See: How
To Do A Break-Even Analysis and How
To Grow Your Business To The Break-Even Level)
The two articles above should answer most of your questions
about computing break-even levels for your business. If not feel
free to email
me or check with your accountant.
The Last Word On Feasibility Studies
Some common mistakes often made by new business startups are:
1. Underestimating the amount of startup costs needed for
inventory or unexpected expenses. There is always something that
was overlooked in the planning.
2. Not having a business plan and marketing plan to refer
to when making tough decisions. Sometimes a business must be
altered even before the doors open. Your decisions now could
affect your business as far as five years down the road.
3. Expanding too fast. You have not developed lines of credit
or sufficient reserves to handle substantial business increases.
It's usually always better to grow slow and steady than to grow
too fast.
Last but not least look for similar businesses in towns of
your size and make up. If you are convinced it will work... look
one more time and then go for it.
Have a business question for Tom? Click
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This article may be reproduced for your non-profit
group or organization provided it is not altered in any way and
the following is attached:
©1998 - 2004 Eagle Marketing PO Box 271 Bozeman, MT
59771-0271
http://www.smalltownmarketing.com - (406) 585-0219 - Toll FREE
(888) 550-6100
email: tommail@smalltownmarketing.com
Based in Bozeman, MT, Tom Egelhoff is the author of How To Market, Advertise & Promote Your
Business Or Service In A Small Town, and The
Small Town Advertising Handbook: How To Say More And Spend Less.
He is also a seminar and workshop presenter
and trainer. He may be reached at 888-550-6100 or PO Box
271 Bozeman, MT 59771-0271
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