Is My New Venture Idea Profitable?

 
 
Subscribe to our free E-Newsletter, "Agri-News" (formerly RTW This Week)Agri-News
This Week
 
 
 
 Preliminary assessment | New venture concept | Market assessment | Cost-Profit analysis| Plans for future action

As an entrepreneur exploring the potential of a new venture you must answer the following question, "Can my new venture idea make money?" A feasibility study will help you in answering this question as well as assist you in transforming your new venture idea into a successful business.

A feasibility study is the first comprehensive plan you will need to complete. It is a systematic gathering, recording and analysis of information regarding the potential success of your new venture idea. In other words, it is a screening process used to identify business opportunities around which a business plan and a business should be developed.

Typically a feasibility study includes:
Preliminary Assessment
New Venture Concept
Market Assessment
Cost-Profit Analysis
Plans for Future Action

This worksheet will assist you in assessing the feasibility of your business idea. It is designed to help you screen out ideas that have limited opportunity, allowing you to invest your time, money and effort into ideas with a high potential for success.

Preliminary Assessment

The steps involved in evaluating and choosing a new venture not only include assessing the potential to generate the desired level of profit in the desired time frame but also the preliminary assessment of both personal and project considerations.
Prior to evaluating the financial feasibility of your business idea you need to ask yourself the following questions:

  • Why do I want to start this new venture?
  • What do I want to accomplish by starting this new venture? (be specific)
    • Short-term (less than 1 year)
    • Intermediate (1 to 3 years)
    • Long-term (3 to 5 years)
  • What is (was) my family's reaction? The decision to start a new venture affects the whole family therefore it is important to have their input.
  • How will my lifestyle and my family's lifestyle be altered?
  • Do I have the necessary skills required to develop and operate this new venture? If no, what skills do I need to develop? Should I hire someone who possess the skills I am lacking?
New Venture Concept

Once you have evaluated your personal and family commitment and your ability to enter a new venture you need to evaluate the potential success of it. It is critical for you to be able to explain clearly and concisely what your product/service is. If you have difficulty explaining your product/service to others your new venture idea needs to be refined. A well-defined idea will ensure your feasibility study is accurate and contains all of the information required to make a well informed decision.
  • Briefly describe the business you want to enter.
  • List the products and/or services you want to sell.
  • List who will use your product/services.
Market Assessment

Assessing the market potential of your new venture concept is a critical component of any feasibility study. A serious miscalculation many entrepreneurs make is to assume that because their idea appeals to themselves and their family that other consumers will also like their product/service and therefore purchase it. Comprehensive, unbiased market research will assist you in determining the true viability of your of your new venture idea. Through market research, you will gather and refine information about:
  • Customers
  • Market size
  • Industry
  • Competition
Customer profiles
A thorough understanding of your potential customers is essential to the success of your new venture. When defining who your customers are, you may be tempted to describe them in the broadest terms as all individuals who might use your product/service. By doing this it gives you the impression you have an exceptionally large market when in reality you may only have a niche market. Since the success of your new venture depends upon your ability to meet your customer's needs and wants you must clearly define your target market.
  • Who are your customers?
  • Where do they live?
  • What are their needs and tastes?
  • What can they afford?
Demographic description
Although each customer is unique, as a whole they can be categorized into groups according to age, income, lifestyles, as well as other characteristics. People in one group may choose the same product because it meets their needs. Demographic information will provide you with meaningful information related to your potential customers interest, need and ability to purchase your product/service.

Use the following to help you define the demographic profile of your target market:
  • gender (male/female)
  • age range (child, teen, young adult, middle-age, senior)
  • occupation type (white collar, blue collar, student, sales, retired, self-employed)
  • income range
  • hobbies & interests
  • ethnic/cultural
  • other important characteristics
Geographic description
Defining the geographic area you intend to market your product/service to is probably the easiest part to define. This definition should be as specific as possible indicating whether your new venture will service a certain region, city, province or country. It is also important to look at the population density.

Use the following to help you define the geographic profile of your target market:
  • Are you targeting urban Albertans? Where?
  • Are you targeting rural Albertans? Where?
  • Are you targeting rural Albertans? Where?
  • Are you targeting all Canadians?
Psychological description
Psychological factors are more difficult to identify but are equally important as they influence your target consumers' purchasing decision. Psychological factors explore the aspects of self image - what customers see or want to see in themselves. For example, a farmer may pride himself/herself on being extremely progressive in the agriculture industry.

On the list below, check off all the traits that characterize your target consumer.
  • Status seeking
  • Trend-setting
  • Conservative
  • Environmentally conscious
  • Family oriented
  • Other
Purchasing description
The identification of the purchasing patterns of your target consumer will assist you in predicting your sales. Answer these questions:
  • Why will the customer purchase your product?
  • How often will the customer purchase your product?
  • How much of your product will the customer purchase?
  • Why will the customer continue to use your product?
  • How will the customer learn about your product?
  • Where will the customer buy your product?
Buying sensitivity description
Consumers make decision on what to buy based on a number of factors. Determine how sensitive would be to the following:

Customer SensitivityHigh Medium Low Not at All
Price
Quality
Special Offers
Where Purchased
Credit Available
Promotion
Packaging
Market Size and Trends
.
Once you have defined the characteristics of the customers you are targeting you must assess the market size and evaluate the trends that will affect the market size and customers buying habits.

Size
You must make sure your customer base is big enough to sustain your new venture. Determining whether your market is sufficiently sizeable will be a matter of intuition and observation. The demographic and geographic information you collected on your garget customers will assist you in determining your market assessment.

Trends
Identifying the market trends that may affect your market in coming years is equally important in assessing the market potential of your new venture. By doing this you will have a sense of your company's long-term viability, strategic opportunities the market presents and how you must respond to the changing behaviors of the customers.

Use the following questions to help define your market size and trends:
  • Approximately what is the size of your current market?
  • Will your target customer base grow in the future?
  • What changes are taking place within your target market?
  • What changes are affecting the customers desire and ability to purchase your product/service?
Industry analysis
Although all new ventures are unique, all businesses operate as part of a larger overall industry and the forces that affect the industry will affect your business as well. In order to be successful you need to recognize, plan for and deal with the industry issues that will affect your new venture.

In your feasibility assessment you should focus on:
  • Description of your industry
  • Current trends of industry
  • Opportunities within industry
Use the following questions to help you in compiling this information:
  • What industry are you in?
  • What is the size of the industry?
  • What is the growth of the industry?
  • What regulations affect the industry?
  • What implications do the industry regulations have on your business?
  • What are the current trends in the industry?
  • What opportunities have you identified in the industry?
Competition
Analyzing your competition is one of the fundamental elements of market research. You need this information to determine what your own market potential will be. Competition can be classified into two categories: direct competition and indirect competition. Direct competition occurs between marketers of the same products. Indirect competition occurs between marketers of similar products or those competing for the same dollar market. For example, indirect competition of soft drinks may be non-carbonated drinks, fruit juices of milk products.

Answer these questions about your competition:
  • Who is your competition?
  • What are the major strengths of each competitor?
  • What are the major weaknesses of each competitor?
  • What kind of quality and service do they provide?
  • At what price?
  • What kind of customers do they attract?
  • What makes them successful?
  • What makes your product/service unique to your competition?
  • Why would customers purchase your product/service rather than your competitors?
Cost-Profit Analysis

In addition to determining your market potential of your new venture idea, it's also important to consider the financial components of your business. Collecting potential sales and cost information will assist you to make reasonably accurate financial forecasts that can be used on evaluating feasibility of the new venture.

Start-up
The financial analysis process starts with the estimation of funds required to start your new venture. The start-up costs can be divided into two categories:
    One-time costs - These are expenditures that must be made prior to you opening your business and they are not going to reoccur on a regular basis. Some examples are: starting inventory, land, buildings, building repairs, utility hookup, etc.

    Operating expenses - These are expenses required to carry out the daily operations of the business. Examples are: employee wages, raw materials, rent, supplies, marketing costs, etc. It is recommended that sufficient funds should be available to cover two to three months operating expenses and provide a cash reserve for emergencies.
Preliminary income statement
The next step is to predict what sort of profit you can expect to make by projecting your total revenue and then subtract all anticipated costs. The preliminary income statement will show:
    Predicted sales revenue
    Because your sales forecast is likely to be the most important business projection you will ever make, it's important to support your estimates with as much hard data as you can. Information collected in the market research section will be of great assistance to you.

    Cost to produce product or provide service
    Industry averages are an excellent starting point for establishing realistic estimates on how much it will cost to produce to provide your new venture idea.

    Projected fixed and variable operating costs
    Fixed costs - costs that remain constant regardless of the number of sales
    Variable costs - costs that vary depending upon the volume of sales.

    Projected net operating profit/or loss
    Profit/loss = projected sales revenue minus cost to produce product/provide service and projected fixed and variable costs.
Breakeven analysis
Breakeven point is the amount of sales you have to make in order for your total costs to equal your total revenue.
It is important to establish your breakeven point prior to proceeding too far into developing your business. If it appears the breakeven volume is not achievable, the new venture idea has limited potential for success and should not be pursued.
Breakeven = fixed costs divided by unit selling price - variable costs

Plans For Future Action

The previous information was developed to assist you in completing a feasibility assessment for your new venture idea. When you have completed this evaluation you need to give some thought to where to go from here. If the feasibility assessment indicates a high potential for your new venture to be profitable the next step is usually to develop a business plan.

If your feasibility assessment indicates that your new venture idea is not likely to be profitable, don't be too disappointed. Think of all of the time and money you saved by not starting a business that has a low probability of success.

Where to get help
Provincial government
  • Alberta Agriculture and Rural Development: New Venture Coach
  • Alberta Economic Development
  • Agriculture Financial Services Corporation
Federal government
  • Business Development Bank of Canada
  • Business Planning for Agri-Ventures
  • Community Futures Development Corporations
  • Farm Credit Corporation
  • Women's Entrepreneur Initiative
Business service centers
  • The Business Link (Edmonton)
  • Calgary Business Information Center
Chartered banks
  • Many banks provide booklets and computer diskettes on business planning free-of- charge.
Consultants
Private consultants and management consulting firms. Look for those firms or individuals who specialize in small business.
Larger consulting firms offer:
  • market research
  • market and strategic planning
  • financial planning
  • comprehensive financial services
References
Adam, Rhonda. (1993).The Successful Business Plan: Secrets and Strategies. Oregon: The Oasis Press.

Alberta Economic Development and Tourism. (1995). Starting a Small Business. Alberta: Alberta Government.

Alberta Women's Initiative Association. (1998). Welcome to Business Planning. Alberta. Doman, Don, Dennison, Dell, Doman, Margret. (1993). Look Before You Leap: Market Research Made Easy. Vancouver: Self Council Press.

Lethbridge Community College. (1995). Entrepreneurship Facilitators Manual. Lethbridge: Lethbridge Community College.

Gibson, Eric. (1994). Sell What You Sow - The Growers Guide To Successful Produce Market. California: New World Publishing.

Good, Walter, A. (1993). Building a Dream - A Comprehensive Canadian Guide to Starting a Business of Your Own. Toronto: McGraw-Hill. Ryerson.

Gray, Douglas. (1993). Have You Got What It Takes. Vancouver: Self Council Press.

Teffany, Paul., Peterson, Steven. (1997). Business Plan for Dummies. Chicago: IDG Books World Wide.

Timmons, Jeffery. (1994). New Venture Creation - Entrepreneurs for the 21st Century. Chicago: Irwin.
 
 
 
 
For more information about the content of this document, contact Kathy Bosse.
This document is maintained by Joan Bates.
This information published to the web on July 17, 2003.
Last Reviewed/Revised on July 9, 2013.