How Feasible is Your Business Venture?

As I mentioned in my last blog I teach a couple of NC REAL classes a year. One of the bankers that helps us always tells our classes on the night he does his Q&A about the best business plan he ever reviewed (and he’s seen a bunch). The best plan he ever reviewed was for a Worm Farm. He tells the class how beautifully written it was, how well it was organized, and how professionally it was published. Students invariably ask if the entrepreneur got the loan. The banker’s response is always a surprise, “No, I turned him down because it was not feasible. It never would have worked.” I believe that our students benefit greatly from this insight. No matter how well your plan is written or how well you describe your venture if you cannot convince your lenders or investors that your concept is feasible you will experience rejection.

A feasibility study is perhaps the most important step in the early stages of your business formation. The feasibility study can help identify the components that must be in place for your business to succeed. A feasibility study should begin with the entrepreneur conducting a thorough introspection. We have an inventory that we ask our NC REAL participants to complete titled, “Am I Entrepreneurial Material?” The purpose of this exercise is to assess participants’ entrepreneurial aptitudes, to identify the traits and experiences common to successful entrepreneurs, and to acknowledge the value and limitations of assessment tools. We want our participant to recognize that successful entrepreneurs come in all shapes and sizes. This inventory was designed to give participants an idea of how they measure up to the factors experts think are most important. We emphasize that the profile is one indicator of their readiness to start a business, but it cannot predict success.

Once the prospective entrepreneur has developed a better understanding of their personal inventory of the skills and traits they possess (or lack) to be a business owner they are ready to proceed with the feasibility study. The components of a feasibility study include:

· Description of the Business: What products or services will be offered and how they will be delivered?

· Market Feasibility: What industry is the business in? What are the characteristics of the industry? How would you characterize the current market, anticipated future market potential, competition, sales projections, potential buyers, etc. of your business?

· Technical Feasibility: How will you deliver a product or service (i.e., materials, labor, transportation, where your business will be located, technology needed, etc.)?

· Financial Feasibility: How much start-up capital will you need? What are the sources of capital, returns on investment, etc.?

Some entrepreneurs use a S.W.O.T. analysis to answer some of the above questions and to find potential obstacles and opportunities for their venture. S.W.O.T.—strengths, weaknesses, opportunities, and threats—is an extremely useful tool, for both a feasibility study and business plan development. The purpose of S.W.O.T. is to practice a systematic process of analysis, to assess the feasibility of a business idea, and to develop plans of action based on the analysis conducted. For example, when conducting the market feasibility component of the study you may find that one of the weaknesses that you identified in your S.W.O.T. analysis is a strength for one of your competitors. If this is the case then the changes to your marketing strategy to address this weakness may determine the success or failure of your venture.

The S.W.O.T. analysis is one framework that can be used by an entrepreneur. Another tool that is particularly useful when conducting the financial feasibility component of the study is breakeven analysis. A breakeven analysis should be completed near the end of your study. This tool requires an in-depth understanding of the industry and market. For example, if you don’t have accurate pricing and cost data for your analysis the end result will be meaningless. Pricing requires a good understanding of the demographics of your market, the price threshold for your customers, and competition. In addition, if start-up capital is required the cost and accessibility of these funds must be accurate. Other details such as business locations and their associated costs must be know or estimated. You should be able to defend every cost or revenue item in the analysis. If utilities listed are listed at $300 per month this figure should be based on research. What utility charges do similar businesses in your area incur? Utility companies can also be a good resource.

The more novel the concept of your venture the more in-depth your feasibility study needs to be. It may be necessary to use sophisticated forecasting techniques, simulations, test marketing, etc. The most complicated business concept that I have seen through NC REAL was a medical lab that specialized in DNA testing and research. Due to the complexity of the business it will be several years before the lab is launched. On the other hand if your business is similar to other businesses in your area your study will be much less involved.

The end result of a feasibility study is often a decision not to proceed with the venture. This result is perfectly acceptable. It is far better to realize that you are not prepared to launch a successful business than to launch and fail after losing valuable time and money. A feasibility study will never guarantee success—every new venture entails a certain amount of risk—but it can be a crucial step in taking your business from concept to reality.

Bootstrapping

I am a Business instructor at Isothermal Community College in Spindale. Over the last several years our local economy has changed from large manufacturing to small business. We have seen many plant closings and a corresponding loss of jobs. As a result of our changing economic reality our focus at Isothermal, in the business area, has begun to shift from a corporate emphasis to small business and entrepreneurship.

Over the last couple of years I have had the opportunity to work with aspiring entrepreneurs through our student body and through NC REAL( a not-for-profit organization dedicated to helping rural high schools and post-secondary institutions, and community-based organizations create entrepreneurship programs which enable students to create their own small businesses and explore self-employment ). Funding is a concern of the majority of the students in our REAL classes. Most of our students believe that they need to raise money to start a business through bank financing, Venture capitalists, and other sources of external funding. While this is true for some businesses many other entrepreneurs either cannot obtain the necessary funding or would be better served, at least in the beginning stages of their venture, by bootstrapping. Bootstrapping or the avoidance of external financing is an often overlooked or discounted alternative to external funding for entrepreneurs.

There are many benefits to bootstrapping. The first benefit is obvious---there are no investors. Investors not only have a claim on any future profits but they may also have an impact on decision-making. While investor input can be valuable investors who do not share your vision or values may be a major distraction as well as a source of stress. Secondly, with bootstrapping there are no monthly loan payments. Business loans can be difficult to get and even more difficult to pay back. A simple breakeven analysis can shed light on the potential burden of the increased overhead brought on by too much debt. Often the cash obtained from financing is misdirected. One of my favorite quotes is from Stephen Covey, “The main thing is to keep the main thing the main thing.” Well in business the main thing is sales. It is easy to lose focus when starting a business and burn cash on expensive office furniture, an expensive storefront, or unnecessary equipment that have little or nothing to do with generating sales. Bootstrappers are more likely to focus on cash flow and short sales cycles which helps to avoid the sure death of any business—a cash shortfall. Thirdly, you also learn a great deal about your market by bootstrapping. Your product or service can be field tested and improved. Pricing can be refined. New opportunities can be found and explored. Your market experience can greatly reduce the risk involved in expanding or growing the business. Finally, bootstrapping focuses your attention on your business. Finding investors or obtaining loans can be very time-consuming. Instead, an entrepreneur could spend that time and energy improving their product or service and selling (keeping the main thing the main thing).

A popular segment of our REAL class is “Banker Night”. On “Banker Night” we have a couple of local bankers visit the class and field questions from our students. This is a valuable learning experience for our students because some of the fear of the unknown is eliminated as they ask questions of the bankers. The questions can address the actual concerns pertaining to a specific business plan or they can be hypothetical. The insight that is gained not only helps our students to better understanding the funding process it also helps them to recognize shortcomings in their plans. Additionally, as “Banker Night” unfolds the benefits (or necessity) of bootstrapping becomes more clear. The bankers point out that they want the entrepreneurs to succeed. They basically evaluate the risk involved in loaning money and try to determine the likelihood that the loan will be repaid. They also offer suggestions that will improve the likelihood that the loan will be approved. A key point the bankers always make is that it is easier to obtain funding if the entrepreneur has some experience in the business or has already started the business with some level of sales. Novices are considered very risky. If the applicant already has some sales or customers then the beginnings of a track record is established and risk is reduced. For example, one student started a business importing furniture and selling it on Craig’s List. Due to his low overhead his initial funding needs were met by the cash flow generated by his sales. As his sales grew his goal was to open a retail storefront location locally in order to expand his sales. Since he was able to show his banker that he was generating sales he was able to obtain the funding to open his store. To the banker this entrepreneur had established a track record and therefore represented lower level of risk than a novice entrepreneur with no experience in the furniture business.

Many other types of businesses can be established this way. Although service based businesses are easier to bootstrap think outside the box, get creative-- instead of opening a restaurant begin by starting a catering service. Instead of opening a retail storefront begin a retail operation on Ebay, Craigslist or Amazon or through your own website.

There are drawbacks to bootstrapping. It can be very slow to grow a business in this manner. A large infusion of cash can also give a business the resources it needs to reach the next level. Additionally, many businesses need a large amount of start-up capital. However, for many aspiring entrepreneurs bootstrapping is the only viable way to success.

Below I have added a link with some good tips for bootstrapping.

http://www.entrepreneur.com/magazine/entrepreneur/2009/may/201102.html