This week we conclude on what we started last week by discussing the how of conducting business idea feasibility tests. We want to see how information can be obtained and specific tests conducted. For the constraint of space, we will consider only a few market and financial variables.
The tests of business feasibility start with the entrepreneur raising questions that must be answered to ascertain the viability status of a business concept. The questions will cut across all the dimensions discussed earlier. The more pointed questions you ask and the better answers get, the better will be the quality and reliability of the test results.
Market questions that must be answered may include what is the size of the market? Is the market growing or shrinking, and at what rate? Can your potential customers afford the selling price of the product? What is the competition doing? Financial questions can include what amount of funds you require and for what? What will be your production cost? At what volume and when will the business break even? To answer these questions, you need to do a lot of physical and dispassionate intellectual work.
Market information: Generally, market size can be established from industry reports, annual accounts of companies doing the same business that reveal revenue volumes and market shares. Market growth rates can be estimated from demographic reports and economic indicators from the National Bureau of Statistics (NBS) and the Central Bank of Nigeria (CBN). To find out if target customers will pay the price that you will be offering, you can check the prices of competing products and their corresponding sales volumes. Similarly, you can conduct direct surveys asking pertinent questions to the target customers.
If you, for instance, want to open a restaurant at a working area like Broad Street, Lagos, or Adetokumbo Ademola, Wuse II, Abuja, you will need to make footprint and drive-in estimates at various times of the day and various days of the week at about the location. You should also try to get the estimates of online orders that nearby restaurants take. To understand the competition, visit other restaurants in the area and see what they are doing and how they are doing it. Who are their customers? What is on their menu? How is the food quality? What are their prices? What other services do they offer? You can also survey their customers to understand what attracts them to the restaurants and what other services will fancy them.
Financial information: A start-up entrepreneur will need to establish costs of equipment, raw materials, salaries, utilities, etc. The appropriate way to do this is to check with various suppliers of the equipment and raw materials so that you can get the actual costs. Fluctuations in raw material costs can and do ruin many businesses. It is, therefore, necessary to get historical costs, seasonal fluctuations and future projections from experienced sales persons, consultants and advisors in the trade.
You can estimate your likely staff costs first by establishing what staff vacancies you need to fill and the salaries and other benefits that such staff earn in the industry. You can get salary estimates from recruitment agencies, as well as employees working in the industry. Energy costs are critical in Nigeria. You will need to know the power consumption of all the equipment you need, for how long they will operate daily and what is the current electricity tariff from your local Distribution Company (DisCo). Where an auxiliary power plant will be used, you must know its fuel consumption rate and fuel cost per appropriate unit of measure.
These exercises and more should reveal to you the costs of equipment, as well as the materials, labour and overheads that will make up your unit production costs. Having determined what selling price your target customers will willingly pay, you can work out your break even volumes, profitability, etc. You can then make projections with the appropriate market growth rates and other economic indicators.
At the end, the information you get from your must-be-detailed surveys and studies is what you will analyse to understand what the overall status of the idea is. Unless where friends and family are professionally competent on a matter or where they are potential paying customers, their opinions must only be taken lightly because they will most likely not be dispassionate with you. On the other hand, you should consider engaging a reliable, trusted and competent senior or mentor who has been there to help you interpret the information and data for a second opinion. Regardless of opinions though, remember that you are ultimately responsible for your idea, its quality and success. It is perfectly possible that you see and believe in certain things that make the idea viable, but others do not.
The ideal issue to take up next should be planning. However, funding a business seems to be the misplaced preoccupation of most aspiring entrepreneurs. We will, therefore, step ahead to that in our next week’s column, Entrepreneurship: Funding Your Business, before we return to business planning.