Evaluating a Business Idea
Evaluating a business idea
Many people have an idea for a business, not many take that idea beyond the first thought. Even fewer attempt to evaluate the possibility of turning that idea into reality; and only a fraction of those actually get into the market with the idea.
The diagram outlines an evaluation process
The reason, of course, why so few business ideas successfully see the light of day is that it is incredibly difficult to do. It requires commitment, dedication, skills, knowledge, strong support, doggedness and perhaps and element of luck.
Whilst there are an infinite number of ways for someone to evaluate their business idea we offer below a process that may provide some structure to the activity and help get to a position where a decision to proceed to the next stage can be made.
With the evaluation of any business ideas there are initially two very important considerations.
- What is your motivation for getting into business for yourself and;
- What are the key assumptions that must underpin the evaluation of your business idea
A misunderstanding of either of these potentially leads to a business failure when you start or the shelving of a perfectly good idea prematurely.
Back to topKey Motivations
It is important to understand why you would want to get into business. A broad range of factors may be involved from income and wealth generation through to life style issues or even social conscious. It may be that you have a very strong entrepreneur streak in you. There many ways you can ensure that you have a good handle on what is important for you.
However the downloadable tool available here attempts to pull together where your prime motivations are centred. The tool asks you to score a series of statements and then provides the opportunity for some personal reflective analysis in a structured way. It is nothing sophisticated or unique just some structured thinking, it is in Adobe PDF format. Motivation for Business Self Assessment Tool
A wise follow up to this self-assessment is to check the outcome with family members, colleagues or friends, people who know you well. Do they agree with your self-assessment? Are there are significant differences in view? If so check the assessment; have you been honest in your answers?
Back to topKey Assumptions
The assumptions you make at this early stage of evaluating a business idea are most important. They will largely determine whether the idea goes forward or not. In practice working with your assumptions is an iterative process.
Make an initial assumption; this will be based upon a mixture of research, prior knowledge and perhaps judgement. It is good practice to note the sources and any relevant parameters and links. For example making an assumption on sales growth rates, will amongst other things, be related to general economic growth as expressed by GDP, this in turn will be related to interest rates and general economic wellbeing and so you may ask whilst the impact of my assumption is good whilst the GDP is growing strongly what will be the impact if it slows down?
Feed your assumptions into your evaluation process and review the outcome. Does it feel justifiable? Remember it is not a definitive outcome it is totally related to your assumptions, don’t kid yourself. Still feel weak? Seek corroborating data, do additional research and revise and refine your assumptions and re-evaluate. Keep going round the loop and hone your assumptions and justifications for your evaluations. Making assumptions is not a once off process but should be continuous as your business idea moves to implementation and into growth. Regularly look at previous assumptions and actual outcomes, where there mistakes? What can be learnt? Are there new sources of information or wisdom?
Back to topTypes of Assumptions
The key assumptions for evaluating a business idea can be large numerous and varied and unique to the type of business or industry your business idea relates to. However some basic headings are common.
Assumptions you will make that will be evaluated in a model of some sort:
- Market size and growth
- Customers and why they buy
- How quickly will customers pay you
- How will you tell your customers about your product or service
- How will you sell your product or service
- Price levels for your product or service
- Marketing and promotional plans and costs
- Do you need premises, where will they be?
- Sources of supply for incoming goods and services and their costs
- How quickly you need to pay suppliers
- Investments necessary and their financing
- Numbers of people and the type of skills necessary
- Technology and equipment
- Controlling and assuring quality
- Sources of finance, interest rates and exchange rates
- Issues of Intellectual property
Assumptions you will make that inform your strategy:
- Competitors, who they are how will they react to your entry into the industry
- What is the product or service uniqueness or strength, how is it different from the rest?
- The effect other external Influences such as Government or changing technology could have
- What is and could happen in the general economic environment.
- What is and could happen to legislation that could impact your industry.
- Are there sociological or ecological trends and influences that could have an impact on the industry or your product or service?
- Risk evaluation
Some tools relevant to setting and evaluating strategy are available elsewhere in the ESA under Strategic Planning.
Back to top