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Planning Your New Business: Feasibility Analysis Part Two

Aug 17, 2007
So, you've got a pocketful of dreams about becoming the next small entrepreneur (hey, it doesn't hurt to dream a little) and an armload of hard facts relating to grabbing a tiny piece of those dreams (probably a smaller piece then you'd like, but reality does have that effect). Your feasibility analysis isn't complete though - not by a long shot. Now you'll be plotting out the course you're planning to lead your business in.

Fortunately, these decisions are purely theoretical, meaning that you can change your choices based on what you discover for yourself. To paraphrase Rommel, you can't become absorbed in your own theories; you must adapt them to the conditions. The Desert Fox was speaking of tank warfare, but the modern economy is a battlefield as savage, if not as bloody, as any other.

Developing a sound structure is the next step in your analysis. There is still a lot of flexibility here, as the type of business that you are seeking to start will help define what kind of structure you need to have. Take into account the type of people who will be doing business with you and what type of people may be working within your business. These are important considerations.

Artists require a very different structure than actuaries. At this point in the study you should also begin to thing about location. Do you need to be around other businesses that are like yours? Is there a particular place where people go to engage in your type of business? Being in the wrong place at the right time can be a recipe for quick failure for a start up business.

Get out your calculators and your old math class notes, because the fourth step, financing issues, will require every mathematical skill you've got. For the feasibility analysis, you'll want to plan for costs for the first full year of operation.

Your first concern is that year's expenses. Start-up costs, such as buying the space and tools you need, are probably going to be the most daunting and discouraging task of the analysis, but you still must continue to expect the worst. Though you'll probably end up cutting costs somewhere, don't skip buying vital items entirely, though finding lower prices for these items will probably help you immensely.

You'll also have to tend to personnel costs for your first year; find out what positions you'll need to hire people to fill and how much you'll need to pay those people for those positions. Similarly, you'll also want to provide money for your own survival. There will also be operating costs, ranging from shipping costs to rent to power and water bills.

There a few figures you'll want to total up at this stage of the analysis.

The first is your total fixed costs (TFC), which are expenses that the cost of which won't change.

The second is the price of a single unit of what you're selling (P).

The third is the variable costs (VC), the cost to you, the business owner, of producing a single unit of your product, whatever it may be.

The number of products you need to sell for your business will to pay for itself (the break even point, or BE), can be calculated by dividing your total fixed costs by the number you get after subtracting the price of each unit by the cost to produce each unit, or BE = TFC % P - VC.

If you are at all hesitant or uncomfortable with the number of units that you think you can move annually, go ahead and refigure with more accurate numbers. It's not a big deal to go back at this stage and make a change. The point is to make your predictions realistic so you don't run headlong into failure down the road. You want to move on from this point in the study with a firm idea of what your potential is.
About the Author
John Edmond worked for many years in insurance and finance and now writes on a number of topics including new business feasibility and email marketing
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