Evaluating Your Business Idea FAQ

Questions:

• How do I evaluate and develop a business idea?
• What type of business should I start?
• Are there any types of businesses I should avoid?
• What are the benefits of starting my own business?
• What are the risks of starting my own business?
• How can I tell if my business will make money?

Answer:

How can I tell if my business will make money?

Even a good business idea might not be financially workable. To learn how your idea will fare, you should prepare what's called a "break-even analysis." In a break-even analysis, you project income and expense estimates for a year to determine whether, in theory at least, your business will make enough sales revenue to pay its expenses.

A break-even forecast includes the following:

• how much your business will earn over a specified period of time (your projected sales revenue)
• your fixed costs, such as rent and insurance
• your profit after deducting the direct cost of the product or service you provide (your gross profit), and
• the sales revenue you will need just to keep your business running (your "break-even point" or "break-even revenue").

If you find your break-even revenue represents an amount of work your business can handle -- that is, if you can easily bring in more than the amount of sales revenue you'll need to meet your expenses -- then your business stands a good chance of making money.

For more information on preparing a break-even analysis, see Will My Business Make Money?

For More Information

To learn more about how to choose a business that will succeed, read Running a Side Business: How to Create a Second Income, by Richard Stim and Lisa Guerin (Nolo).