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.


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