Principles of Entrepreneurship - Ch 3

*Financial Feasibility Analysis*

Purpose: Is the final component of a comprehensive feasibility analysis. A preliminary financial assessment is sufficient. Components: *Total start-up cash needed* *Financial performance of similar businesses* *Overall financial attractiveness of the proposed venture*

*Organizational Feasibility Analysis*

Purpose: Is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch a business. Focuses on non-financial resources. Components: *Management prowess* *Resource sufficiency*

*Industry Attractiveness*

Industries vary in terms of their overall attractiveness. Particularly important—the degree to which environmental and business trends are moving in favor rather than against the industry.

*Forms of Feasibility Analysis*

*Product/service feasibility* *Industry/target market feasibility* *Organizational feasibility* *Financial feasibility*

*Concept Statement*

A concept statement is a one-page description of a business that is distributed to people who are asked to provide feedback on the potential of the business idea.

*Overall Financial Attractiveness of the Proposed Investment*

A number of other financial factors are associated with promising business start-ups. In the feasibility analysis stage, the extent to which a business opportunity is positive relative to each factor is based on an estimate rather than actual performance.

*Management Prowess*

A proposed business should candidly evaluate the prowess, or ability, of its management team to satisfy itself that management has the requisite passion and expertise to launch the venture. Two of the most important factors in this area are: The passion that the sole entrepreneur or the founding team has for the business idea. The extent to which the sole entrepreneur or the founding team understands the markets in which the firm will participate.

*First Screen*

A template for completing a feasibility analysis. It's called "First Screen" because it's a tool that can be used in the initial pass at determining the feasibility of a business idea. If a business idea cuts muster at this stage, the next step is to complete a business plan.

*Examples of Non-Financial Resources*

Affordable office space. Lab space, manufacturing space, or space to launch a service business. Availability of contract manufacturers or service providers. Key management employees (now and in the future). Key support personnel (now and in the future). Ability to obtain intellectual property protection. Ability to form favorable business partnerships.

*Characteristics of Attractive Industries*

Are young rather than old. Are early rather than late in their life cycle. Are fragmented rather than concentrated. Are growing rather than shrinking. Are selling products and services that customers "must have" rather than "want to have." Are not crowded. Have high rather than low operating margins. Are not highly dependent on the historically low price of key raw materials.

*Financial Performance of Similar Businesses*

Estimate the proposed start-up's financial performance by comparing it to similar, already established businesses. There are several ways to doing this. First, there are many reports available, some for free and some that require a fee, offering detailed industry trend analysis and reports on thousands of individual firms. Second, simple observational research may be needed. For example, the owners of New Venture Fitness Drinks could estimate their sales by tracking the number of people who patronize similar restaurants and estimating the average amount each customer spends.

*Feasibility Analysis*

Feasibility analysis is the process of determining whether a business idea is viable. It is the preliminary evaluation of a business idea, conducted for the purpose of determining whether the idea is worth pursuing.

*Industry/Target Market Feasibility Analysis*

Purpose: Is an assessment of the overall appeal of the industry and the target market for the proposed business. An industry is a group of firms producing a similar product or service. A firm's target market is the limited portion of the industry it plans to go after. Components: *Industry attractiveness* *Target market attractiveness*

*Product/Service Feasibility Analysis*

Purpose: Is an assessment of the overall appeal of the product or service being proposed. Before a prospective firm rushes a new product or service into development, it should be sure that the product or service is what prospective customers want. Components: *Product/service desirability* *Product/service demand*

*Product/Service Desirability*

Questions: Does it make sense? Is it reasonable? Is it something consumers will get excited about? Does it take advantage of an environmental trend, solve a problem, or take advantage of a gap in the marketplace? Is this a good time to introduce the product or service to the market? Are there any fatal flaws in the product or service's basic design or concept? Concept test: A *concept statement* should be developed. The feedback will hopefully provide the entrepreneur: A sense of the viability of the product or service idea. Suggestions for how the idea can be strengthened or "tweaked" before proceeding further.

*Financial Factors Associated With Promising Business Opportunities*

Steady and rapid growth in sales during the first 5 to 7 years in a clearly defined market niche. High percentage of recurring revenue—meaning that once a firm wins a client, the client will provide recurring sources of revenue. Ability to forecast income and expenses with a reasonable degree of certainty. Internally generated funds to finance and sustain growth. Availability of an exit opportunity for investors to convert equity to cash.

*Product/Service Demand*

Steps: 1. *Talking face-to-face with potential customers.* 2. *Using online Tools, Such as Google AdWords and landing pages, to assess demand.*

*Target Market Attractiveness*

The challenge in identifying an attractive target market is to find a market that's large enough for the proposed business but is yet small enough to avoid attracting larger competitors. Assessing the attractiveness of a target market is tougher than assessing the attractiveness an entire industry. Often, considerable ingenuity must be employed to find information to assess the attractiveness of a specific target market.

*Total Start-Up Cash Needed*

The first issue refers to the total cash needed to prepare the business to make its first sale. An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to generate the first $1 in revenues. The point of this exercise is to determine if the proposed venture is realistic given the total start-up cash needed.

*Talking Face-to-Face with Potential Customers*

The only way to know if your product or service is what people want is by talking to them. The idea is to gauge customer reaction to the general concept of what you want to sell, and tweak, revise, and improve on the idea based on the feedback. In some cases, talking with potential customers will cause an entrepreneur to abandon an idea. Entrepreneurs are often surprised to find that a product idea they think solves a problem gets lukewarm reception when they talk to actual customers.

*Utilizing Online Tools, Such as Google AdWords and Landing Pages, to Assess Demand*

The second way to assess demand is to utilize online tools to gauge reaction from potential customers. Some entrepreneurs purchase text ads on search engines that show up when a user is searching for a product that is close to their idea. Demand for the idea can be assessed by how many people click on the text ad and enter their e-mail address. A variety of additional online tools are available to help assess the demand for a new product or service. Examples include: Sites that provide feedback on business ideas (Foundersuite, Quirky). Market Research (CrowdPicker, Google Trends). Online Surveys (Survey Monkey, Google Consumer Surveys). Q&A Sites (Quora, Stack Overflow).

*Resource Sufficiency*

This topic pertains to an assessment of whether an entrepreneur has sufficient resources to launch the proposed venture. To test resource sufficiency, a firm should list the 6 to 12 most critical non-financial resources that will be needed to move the business idea forward successfully. If critical resources are not available in certain areas, it may be impractical to proceed with the business idea.

*Timing of Feasibility Analysis*

The proper time to conduct a feasibility analysis is early in thinking through the prospects for a new business. The thought is to screen ideas before a lot of resources are spent on them.