June
25
2012

A case study

Alex bought a health food franchise a while ago. This opportunity seemed like a wonderful idea in our increasingly health conscious society and besides, he’s always wanted to do something like this, being himself very health conscious and clued up on nutrition.

Well, instead of the ROI benefits he was looking forward to, the sizeable hole in his wallet was now bringing him worry and heartburn as there were not nearly enough customers and after he’s covered all the business expenses, enable him and his family to live as well. Now’s he trying to rescue his investment from bankruptcy by investing in other related projects that at the end of the day, is eating up what little he has left, while yielding as slight a result as the first deal.

Everything looked good from Alex’s vantage point. The ideal business opportunity he had been searching for became available on the franchise network he regularly monitored, the money to go for it was accessible and he was passionate about this particular kind of venture. So why did it not go according to plan?

The difference between an idea and an opportunity

The classic mistake Alex made was to not differentiate between a good idea and a real business opportunity with money-making potential. Quite frankly, he didn’t do his homework.

You see, all business ideas are indeed based on the premise of solving a need or problem for others, but many ideas do not represent genuine business opportunities. This distinction between ideas and opportunities is so important that failing to understand that difference, can and often does, lead to great money loss.

Sure enough, a lot of factors were in place, creating the illusion that everything was in place. The opportunity was there. The money to go for it was there. The passion to make a success of such a venture was there. But one essential ingredient was missing.

Alex never asked himself the crucial question whether his idea could be implemented in a profitable and sustainable way. He neglected to make sure that enough funds could be generated to not only start his business, but keep it running until it made a profit.

And that is something Alex should have determined before plunging headlong into something without the necessary hard facts.

To determine the real business potential of an opportunity, you need to do an in-depth market feasibility and financial viability study on it. Problem is though, that kind of study takes a lot of time, money and effort.

Solution: you need a way of doing a preliminary feasibility study and viability check on an idea or ideas before going to all the time, money and effort hassle a full scale feasibility and viability study would take. A practise run in other words, to see if the real deal is going to be worth it.

So, just how do you do that?

Easy…find the answers to these questions!

Such a prelim check can be done by finding answers to the following questions:

  1. Does the idea / concept match my personal vision, mission, goals, qualities and skills? – Personal alignment
  2. What will the product / service (material and labour) cost to produce per unit. – Direct costs
  3.  At what price can I sell it? How much would potential customers be willing to pay for my product / service? – Selling price
  4. How much profit can I expect to make directly from each unit of the product / service I sell? – Gross profit
  5. How many people will buy my product / service on a daily, weekly and monthly basis? – Market potential & sales volume
  6. How much income can I expect to generate per month? – Turnover
  7. How much will it cost me to run the business per month apart from costs directly linked to producing my product / service? – Overheads or fixed costs
  8. How much net profit will I make per month? – Profitability

 

 

 

9. How much money will I need to implement / launch my idea? Capital   cost

  • Capital to buy equipment and machinery
  • Capital necessary for daily operations

10. Why will my potential customers rather buy my product / service than those of my competitors? Competitive advantage or Unique selling point (USP)

11. If this idea should fail, what will happen to me and is the risk worth the opportunity? – Risk

A simple example

Let’s assume you have the following info available:

The unit selling price = $50

The direct costs in making each unit = $10

The volume you will be able to sell per month = 150 units

The expected fixed costs per month = $3000

Now by applying the formula given above, you can calculate how much profit you’ll be able to make each month:

[($50 - @10) x 150] – $3,000

= $6,000 gross profit – $3,000 fixed costs

= $3,000 net profit

So, simply applying the above formula to any idea you might have, will enable you to scan your ideas for business potential and then take only those that pass this prelim scrutiny further for the full treatment, investing the resources such an exhaustive scale study requires.

Well, there you have a prelim device to scan your idea(s)! Next time we’ll delve into the real deal with all its bells and whistles like market analysis, calculation of break-even point and developing a cash flow forecast.

See you there!

Elmarie is a wordpreneur for theEntrepreneurialBusinessSchool(Pty) Ltd and a freelance creative-, web- and copywriter.

Resources

1. EntrepreneurialBusinessSchoolManagement Course.

2. Bekker, Mauritz. Where will I be without your encyclopaedic knowledge of all things entrepreneurial and business? A million thanks!


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