My business idea - will it work? Take the Sniff Test

04-Sep-2013

The idea of the new business is a glorious thing. In the mind of the aspiring business owner, it is perfect. Before the reality of costs, staff, landlords and taxes, the imagination can take the fantasy of business ownership to delirious heights of wealth, lifestyle and autonomy.

The imagined business will be done better than anyone else and capture that new idea that the market is screaming for. However, underneath the dream, the mind is subconsciously pulling in the other direction, slightly nervous and wondering “will this thing work”?

The question of viability

It is the most common question I get from soon-to-be business owners, looking for some kind of certainty that they should pursue their great business inspiration. That is a question that can neither be taken lightly or quickly, and needs dedicated research to see if the concept stacks up. But before embarking on a business plan, it’s worth taking the Sniff Test to see if the big idea smells like a budding rose ..or a pile of stinky socks.

The Sniff Test

Work your way through these questions about your proposed business to see if there are any red flags before you take the plunge for a full business plan.

What is your target personal income?

Strangely, aspiring business owners always clam up with this question, but it needs to be answered first. What do you need to earn? What do you want to earn? There’s no point going into business to be worse off, so setting the frameworks for your own needs is vital. If you are really stuck on this question, look at what you currently earn as a starting point then work up or down. Keep it realistic, remembering that as the business grows, so will your income.

How big is the market?

Some quick-and-dirty estimations of market size, especially for new products, will give you a rough indication of the opportunity in the marketplace. Look at your target customers, likely average sales and come up with an estimate for how many customers there are and how much they are all worth. In your case, it could be foot traffic in a particular location, or any other number of potential clients in your catchment area. For example, since I work in the area of small business, estimates for operating small businesses are about two million in Australia, and let’s say I have a $10 product, if they all bought one that’s $20M. To meet my needs that sounds promising and worth investigating further.

What margin are you likely to make?

From what I have seen, operating profits for small business are mostly in the range 15-25%. See if you can get some industry data as an approximation to see what the norms are and use those as your estimate.

How many do you need to sell to make your target personal income? ...and % of the market?

Once you have your frameworks in place, you can work out the practicalities of what your business needs to do. That means how many widgets and how much income you need to hit your target personal income. Let’s use my example again: I want to earn $90,000 per year, at 25% profit, so I need to sell $360,000 worth or 36,000 widgets at $10 each. $360,000 of $20M is a small proportion, so the market penetration to reach my goals is low (all good). What it raises though is that I need to sell 36,000 widgets a year to a geographically diverse target market – this well need some planning to work out.

What is it about your business idea that is rave-worthy?

How many businesses that you deal with are actually memorable? How many would you tell all your friends about or take them there? Not many. Even though USP’s (Unique Selling Propositions) and Points of Difference are very common terms in business-land, very few businesses are actually rave-worthy. The viability of your business concept is greatly enhanced by offering something special.

Making a decision on a new business idea based on a few short questions is no better than projections on the back of a napkin: way over-simplified and fraught with risk. As a sanity check on a new idea, a simple Sniff Test will tell you whether you should go ahead to planning stage, before jump to the next stage.

Dr Warren Harmer