Most people want to have their own small business. Unfortunately, we can see that many of them are failing. The failures of small businesses are caused by many different things. One of the things that can cause a small business to fail is the lack of feasibility analysis.
Before starting their own small business, people need to perform a simple feasibility analysis. The main objective of the analysis is to see whether the business idea is worth pursuing.
The following are several things that people should do when doing their feasibility analysis:
- People need to check whether they have all the resources and knowledge needed to pursue the business idea. When someone is going to open a dry cleaner for example, he or she must have good knowledge about dry cleaning.
- Before setting up a small business, people need to observe the market. Observing the market would involve checking the competitors, estimating the number of potential customers, etc.
- The financial aspect is another important thing that people need to consider before setting up a business. They need to estimate the fixed and variable costs, potential sales revenue, and calculate the break-even figures.
- To avoid pitfalls, people need to identify them right from the start. They need to foresee what kind of problems may arise, and how to deal with them.
After they have done all the steps above, people should be able to see whether their business idea is feasible or not.
When you’re done with your business feasibility study and you find that your business idea is feasible, the next step is to write your business plan. Writing a business plan is important, as it will be your guideline in running your business. Your business plan should explain exactly how you will run your business, with all the exact figures including the capital needed to start the business. You should also provide thecalculation of payback period in your business plan. You can use all the calculation that you put in your business plan to do a review on your business in the future. You can compare the figures in your business plan to the figures that you currently have to see whether your business is running better or at least just as planned, or not.
If you don’t have enough capital to start your business and you plan to attract some investors, you need to put some extra efforts in writing your business plan. Investors are investing their money to get profit, so they would need to see an excellent business plan before they decide to invest in a business. Your business plan should explain how your business can generate profit, how long will the investors get their return of investment, and how much profit they will get. In short, you should try to see from the investors’ point of view when you write the business plan.
Payback period is the time that we need to get the return of investment that can repay the amount of our initial investment. The calculation of payback period is simple. For example, when we invest $7500 in a business that gets $2500 per year, we would have a three year payback period. In calculation of payback period, the time value of money is not taken into account. Payback period is simply being used to measure how long a business takes to pay for itself.
Even though payback period has some limitations, it is being widely used as a method of analysis (especially by people who are running small businesses) because of its simplicity. In any kind of business, shorter payback periods are better than longer payback periods. However, in the calculation of payback period, the time value of money, risk, opportunity cost, financing, or other important considerations are not taken into account.