Businesss Practice
BUSINESS PRACTICE
I (BNP110C)
Chapter 4: The viability of a
business idea
Chapter 4: The viability of a business idea
Learning outcomes:
• establishing whether a need exists for a particular product or service
• defining the mission and objectives of the business
• estimating the market size and share of the product or service
• calculating the income that can be derived from the product or service
• determining the break-even point for the business
• understanding the implications of the break-even point
• determining whether a sustainable profit can be made
• drawing up a cash budget to determine whether the business can
service its financial obligations as they occur
This chapter deals with the planning
stage of the business (turn back to
Figure 3.1 in Chapter 3 again).
This step sets the framework in which
your business will operate.
The viability study
• Definition: ‘entails estimating the interest in the business and
its product or service, the expected sales in units and at a
certain price, the expected costs associated in generating the
sales, the strengths and weaknesses of the business, etc.’
• Before a viability study can commence, market research must
be done
• Typical questions:
• Is there a need for my product or service? (Needs analysis)
• What type of person (customer) will buy my product or service?
(Customer profile/characteristics)
• What can realistically be expected to be sold of this product or service
based on the estimated market size? (Market share)
• How much are customers willing to pay for the product or service? (Price
analysis)
The viability study cont.
• Based in info received from the market
research:
• Estimated number of units that will be sold
• Accepted price that the market will be prepared to
pay for the product or service
• Cash flow requirements for the business
• It is essential that an entrepreneur does a
proper needs analysis of the market and
identifies the characteristics of the
customers
Needs analysis and characteristics of customers
• Firstly: Find out who your potential customers are and
what their needs are and how they make buying
decisions
• Key to success is making sure your product is exactly
what the customer wants
• There is a distinction between the physical products the
customers buy and the image the customers have of the
products
• Focus must be on customer profiles which is a
description of the potential customers
Needs analysis and characteristics of customers
Four questions to establish if there is a need for your
product:
• List the features of the product or service
• Determine who the major competitors and industry
leaders are as well as suppliers and other major role
players in this market
• Identify the possible customers and segment of the
market
• Draw up a final list
The business structure
Types of business structures:
• Sole trader or sole proprietor - This business structure has
one owner and registration of the business is not required
• Partnership - the partners own the business together. A
partnership can be between two to 20 people
• Close corporation (CC) - must be registered as a business
entity. The number of individuals - not more than 10
• Company - when more than 10 people starting a business
choose to create a separate legal entity
The business structure
What is meant by the concept of 'creativity and innovation'? Chapter 3
The business structure cont.
Legal considerations:
• New Companies Act
• Consumer Protection Act
Practical checklist when starting a business:
• Decide on the type of business entity that you wish to form: a public
or private company.
• Choose your enterprise’s name and think about at least two
alternative names.
• Draw up your business plan.
• Await your enterprise registration number from the Companies and
Intellectual Property Association(CIPA).
The business structure cont.
• Apply for your VAT (value-added tax) number; income tax
number; PAYE (pay as you earn); SDL (skills development
levy); and UIF (unemployment insurance fund) numbers from
the Botswana Unified Revenue Service (BURS).
• Register your logo as a trademark with the CIPA.
• Ensure that all the enterprise’s intellectual property is
copyrighted.
• Registering for copyright, patents, trademarks and designs is
not compulsory for every enterprise.
The mission statement and objectives of the
business
• Once you have decided on the type of business, you must
define your business, using the following questions:
• Who are the customers of the business?
• Which customer needs will the business satisfy?
• How will the business satisfy these needs?
• Mission statement: “…defines the fundamental and unique
purpose of a business and identifies its products or services,
as well as its customers.”
• The mission of a business is defined by customers satisfaction by its products
and services
• Objective: “…something the business wants to achieve over a
set period of time.”
• Objectives are necessary so that you have something against which to measure
progress
• Objectives are usually adjusted over time based on changes that take place in
the industry
Calculating the expected market share
Can be classified:
• Informal
• Micro
• Very small
• Small
• Medium
• Large
Calculating the expected market share
• Calculating the potential market:
• Market segmentation
• Demographic segmentation
• Geographic segmentation
• Psychological segmentation
• Behavioristic segmentation
• Evaluation and the target-market decision
• Market positioning
• Calculating the size of the market
Calculating the expected market share
• It is not easy to estimate the expected market
share, but it is important to do so as
accurately as possible in order to calculate a
realistic potential income.
• To be realistic and reduce your risk, you
should calculate in terms of three scenarios:
i. a prosperous one; idealistic(the highest
possible outcome)
ii. a conservative one(miimises the highest
risk)
iii. the most likely one
Calculating the expected market share
Calculating the income
• Calculating the cost price of the product/service
• Variable and fixed costs
• Direct and indirect costs
• Calculating the total costs per unit of the
product
• Manufacturing costs
• Commercial overhead costs
Calculating the income
Calculating the income
Calculating the income
Calculating the income
• Calculating the selling price
• The price you can charge for your product or service is
directly influenced by the competitors’ prices for the same
kind of product or service.
• Calculating the expected net profit
• After establishing the costs and mark-up for your product,
you are now ready to test the viability of the business.
• To be viable, the business idea must be profitable.
Calculating the income
Calculating the break-even point
• ‘Break-even is the volume where all fixed
expenses are covered.’
• Ways to lower break-even:
• Lower direct costs, which will raise the gross
margin
• Control the cost of your fixed expenses
• Raise prices
• The goal is profit!
Calculating the break-even point
The aim is profit
• You are in business to make profit not break even
• Break-even point allows for better management of the
business:
• Allocate the sales and marketing effort to the point you
need to be
• You can control costs in a slow month
• You can maximise profits by understanding the
elements of your break-even figure
Cash Planning
• Cash planning: the cash budget (cash forecast)
• ‘a formal plan for forecasting future receipt and
payments of cash.’
• The purpose of cash budgeting
• plan short-term credit needs
• presented to your bank or other financial institution
• help predict cash shortfall
• highlight problem areas in payment schedules
Cash Planning
• Consistent budgets
• Cash budgeting is a continuous process that can
be checked for consistency and accuracy by
comparing budgeted amounts with amounts that
can be expected, and by using typical ratios or
financial statement relationships.
• Analysing the cash budget
Summary
• It should be clear that performing a viability
study is an integral part of the planning
process for any business.
• The viability study should be accompanied
by market research to establish exactly who
your customers will be, whether they need
your intended product or service, and who
your competitors will be.
THANK YOU