Evaluating Your Business Idea: Frequently Asked Questions

You’re thinking of starting your own business. Here are some questions you should ask yourself before taking the plunge.

Updated by Glen Secor, Attorney

Questions

    What type of business should I start?

    There are so many different kinds of businesses—and so many different kinds of people—that it's impossible to give specific advice on the particular type of business you should start. Only you will be able to answer that question, but to maximize your chances of success, you should:

    • Choose something you enjoy doing. It's much more difficult (and a lot less fun) to make a success of a small business that doesn't interest you—for instance, running an auto parts store when your heart is really in graphic design.
    • Choose a business you know intimately. Trying to learn a new industry or skill at the same time you're getting your business up and running will add a lot of unnecessary stress to your new venture and lower your chances of success. Sure, it might be fun to run a hair salon, but if you've spent the last ten years baking pastries and don't have any experience cutting hair, you might be better off starting a catering business or opening your own bakery. That's not to say that you can't learn a new business—but you should learn how to run a pizza parlor before you blow Aunt Sadie's retirement money on a wood-burning pizza oven.
    • Choose a business that has a good chance of turning a profit. To determine your business's potential profitability, you'll need to work on a "break-even analysis." We cover break-even analysis below, under "How can I tell if my business will make money?"

    What are the benefits of starting my own business?

    Starting a business can be scary. But creating a successful small businesses can be very rewarding—financially and emotionally. Only you can decide if you're ready to quit your job and plunge into running your own business, but here are some of the potential rewards of going out on your own:

    • Independence and flexibility. You'll have more freedom and independence working for yourself. And once your business is firmly established, you'll probably have the flexibility to make sure you don't miss the moments and events that matter most to you in life.
    • Personal fulfillment. Owning and running your own business can be more satisfying and fulfilling than working for someone else. Many successful small business owners find they enjoy the respect they earn from their peers for having the courage to go out on their own.
    • Making a difference. When you build a successful business, you can make a difference in the lives of your employees and your community.
    • Money. Whether you can make more owning a business than you can working for someone else depends on your circumstances and the profit potential of your business. And only you can decide whether you're comfortable giving up a steady paycheck for the rewards of being your own boss.

    What are the risks of starting my own business?

    Although you can reap many benefits by starting your own business, there are definitely some risks. The most common include:

    • Losing money. You're going to need money to get your small business started. Whether you raid your savings account, hit up friends and relatives, or borrow from a bank, it's possible that your business won't succeed and that you, your friends, or the bank will never see that money again. If your business idea is risky, ask yourself whether you're willing to gamble your retirement, your friendships, and even your good credit on your business idea.
    • Personal sacrifice. Business success can come at a high personal cost. Getting your business up and running may consume most of your time and energy, including your precious evenings and weekends. You may not have much time for family or friends or the extra cash to take a second honeymoon with your spouse. Before you quit your job, decide whether you (and your family) are ready to make some of the personal sacrifices necessary for you to create a successful small business.
    • Inherent business risks. Some businesses come with unique risks, such as ones that use hazardous materials, make edible goods, care for children, sell alcohol, or do construction. You can manage these risks by forming a corporation or limited liability company and purchasing adequate liability insurance.

    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 a break-even analysis and a business plan.

    Preparing a Break-Even Analysis

    In a break-even analysis, you make 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.

    Writing a Business Plan

    To write a business plan, you'll need to think through all aspects of the business. Your plan should address the following:

    • the market for your product or service, including its size, who the competitors are, and the percentage of the market you expect to capture
    • marketing strategies
    • profitability and cash flow
    • financing needs and sources of financing, such as your own savings, credit cards, loans, or investments from outsiders
    • staffing (hiring employees or independent contractors)
    • contingency planning, in case things don't go as you expect.

    While you're evaluating your business idea, your business plan can be brief and in outline form. If you decide to proceed with the business, especially if you need outside financing (from a bank or others), you should flesh out the plan with more details.

    Failing to plan is planning to fail, so make sure to put in the necessary time. For more detail on this critical step, read about why you need to write a business plan.

    Are there other resources to help me evaluate and develop my business idea?

    This FAQ will help you begin to evaluate your business idea and—if you choose to—take the first steps toward bringing it to life. But it's only a starting point, and you can find many resources to help you with the process. Here are two good ones from Nolo:

    For quick information on what's required to start a business, see How to Start Your Own Business: 50 Things You'll Need to Do.

    For a more complete guide to starting your own small business, check out The Small Business Start-Up Kit, by Peri Pakroo (Nolo).

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