Testing a business idea

Everybody has at least one great business idea inside them. At least that's how it seems whenever I introduce myself as an entrepreneur. People always tell me their ideas, what inspired them, and how they see their imaginary business unfolding. Of course, only a very small number of them will ever persue their idea, and in all likelihood, an even smaller proportion will actually make any money from it. So if, like most people, you have a business idea burning in the back of your brain, how do you go about seeing if it is any good (without losing a lot of money and pride in the process)?

What most books will tell you, first off, is that your idea should involve something you love doing. Whilst I agree that for most small businesses this is a wise piece of advice, let's face it - most serial entrepreneurs have their fingers in so many pies that it's impossible for them to truly have a burning passion for every sector that their businesses operate it. Besides, your idea alone is likely to keep you interested long enough to get things going, regardless of whether you get turned on by low cost air travel/coffee/insurance etc. So the first step towards analysing your future business should be: make sure you are obsessed by your idea.

If your idea won't go away and you find yourself staying up late at night on Google seeing if there is any competition, then perhaps it is time to look at the next stage. Will the idea make any money? This sounds like relly basic advice, but several entrepreneurs I know have failed to make even a basic financial forecast before taking the plunge. Whilst for some of them it worked out, I would not recommend investing time, effort and cash into a venture that has not passed some basic financial tests on paper.

A very useful way of seeing if your business can survive its first few years is by preparing a cash flow forecast. This is simple in itself, if you know the costs and potential revenues you can expect to achieve during your first few years of operation. In general if your costs excede your revenues on a monthly basis and you do not have cash in the bank to begin with, then you will have to borrow cash. At this stage it may also be useful to work out your break even point in sales. This will demonstrate the business you have to generate in order to just cover your monthly rent/wages/raw materials/marketing budget/tax. By this point it could become very clear that your business will cost more than it makes, in which case it is probably time to bin the idea. If it looks like a winner, then you will be mentally and emotionaly prepared for the next stage.

Market research is essential for most businesses, and any potential investor down the line will demand a thorough breakdown of your company's potential customers and competitors. Creating a list of competitors can be daunting but inspiring at the same time. When I set up my first business at the age of 19, I identified Ikea as my main competitor for my customer's cash. Whilst I was up against a hugely sucessful company, it made me realise that there was money to be made in that sector, and the task of stealing their customers was so difficult it inspired me to try harder. You must therefore see if your idea has any major competitors doing what you will be doing. If there are thousands of barely profitable companies in the market, then your idea or unique selling point has to be outstanding. On the other hand, if there are maybe two or three 'big boys' in your potential market, you could well have a chance of stealing some of their customers.

Never underestimate the power of people within an organisation. They can make or break it for you, and chosing employees/directors to come on board with you is critical when starting off. For this reason, it is always good to ask, do I know someone inspirational who I can get to join me? Somewhat going against what I wrote earlier about not necessarily needing a passion for your potential industry, It is beneficial to have someone onboard who knows how similar businesses operate. Sometimes there may be pieces of legislation or best practice that the entrepreneur may be unaware of, plus having someone with experience and existing clients within your chosen field could lead to them bringing in your first customers. So when analysing of your idea, think of people you know or who may be able to put you in contact with potential co-founders to supplement your skills.