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Judging Your Business Idea: Is It a Good One?

written by: William Busse•edited by: Elizabeth Wistrom•updated: 5/19/2011

Objective evaluation of a business idea can prove difficult due to the emotional ownership of its creator. By objectively examining the idea and subjecting it to considerable analysis, the validity of the concept can be established prior to investing time and money.

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    The Entrepreneur’s Idea

    If you are just starting out on your own, you may be wondering, "How do I judge my business idea?" For many entrepreneurs, impartially evaluating their own business idea is an extremely difficult endeavor. Entrepreneurs are creative thinkers whose unique vision and willingness to take risks often results in substantial success and great financial rewards. It is difficult to apply a standard template to the entrepreneurial mind since there is a history of radical ideas that are now a part of mainstream culture. For example, Wilbur and Orville Wright’s vision of powered air flight was considered by many to be destined for failure.

    Evaluating the viability of a new business idea is complicated and highly depends on the degree of support and effort applied to ensuring its success. Before committing time and resources to a new endeavor, it is important to thoroughly scrutinize the idea and look to expose any conceptual flaws. By engaging in this process, the entrepreneur will have a better understanding of the feasibility of the concept and any obstacles that may serve as an impediment to success.

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    Testing the Idea

    Before securing financing or infrastructure, a business idea should be subjected to careful examination and viability assessment. Among the various evaluations that serve to illustrate the strengths and weaknesses of the concept are the following:

    * Market Research: Clearly the most important aspect of any business idea is determining if there is a viable market for the product oridea  service. A significant portion of business failures could be avoided by engaging in honest, thorough research relating to market potential.

    An important part of assessing a market is a candid evaluation of the level of customer acceptance to the idea. This is particularly important when engaging in the launch of a product that has no established customer base. Beta testing and customer surveys can help establish the size of a market prior to making a major investment.

    It is also helpful to assess the state of the market in terms of potential demand and whether it is growing or shrinking depending on area demographics.

    * Develop a Business Plan: Even in the infancy stage of a business concept, formulating a business plan will illustrate the strengths and expose the weaknesses in the idea. In particular, identifying markets and developing funding requirements will provide a blueprint for the additional quantifiable research that will be necessary to validate the concept.

    * Consult Professionals: Any successful business idea can benefit from the insight of professionals both inside and outside the industry. Learning from others with prior experience of a similar nature can help avoid obstacles and provide shortcuts to success. This group would include SBA consultants, those in the banking industry, trade association members and consultants among others.

    * Determine Profit Margins: Robust sales are meaningless without the ability to generate a profit sufficient to cover overhead while providing a reasonable return on investment for the owner. Finding the appropriate price point for the product or service is critical in determining profit margins.

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    Further Analysis

    * Personnel: If employees will be required to implement the idea, it is important to assess the level of skill they must possess as well as businessman thinking their availability. Employees are usually the single largest overhead component, and insight into these costs relative to profit margins is a critical relationship. Employees with specialized skills are often difficult to locate and may be expensive to hire even in a soft economy.

    * Finances: Great business ideas usually require a substantial degree of investment capital. Many entrepreneurs underestimate the costs associated with starting a new business. Recognizing a financing shortfall after starting the business can prove catastrophic to the ultimate success of the venture.

    * Competition: No evaluation of an idea is complete without analyzing the number and quality of competitors attempting to appeal to the same customers. This includes their ability to duplicate the idea with a lower economy of scale. It is also important to consider retaliatory responses such as manipulating suppliers or lowering prices to customers.

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    Applying the Research

    With the knowledge learned through research and consultation, the entrepreneur is ready to make an informed decision as to the viability if their idea. If it has withstood the challenges of in depth scrutiny, it is time to proceed to the planning and implementation stage.

    Regardless of the potential of a business idea, the level of commitment and effort required for success can not be overestimated. Expect extremely long hours for an extended period of time without receiving any tangible reward for these efforts. Any future entrepreneur unwilling to make these sacrifices should reconsider the initiative regardless of how promising the concept may be.

    When wondering, "How do I judge my business idea," It is also important to remember that although research is vital, over analysis can result in decision paralysis. Unfortunately, there are no absolutes in business. When the questions have been satisfactorily addressed and the concept still remains valid, it is time to move forward.