Introduction
The desire for one to employ him or herself is a dream that many people try to achieve in the early stages of life but how one can be his or her own boss depends on many factors. Starting up an own business is one of the few ways in which one can achieve this but creating a successful business requires a good combination of a good idea and the driving power to do it.
A successful business requires skills, experience, and ability to make a dream come true as most of the times it involves personal sacrifice particularly during the start up stage. When starting up a business it is necessary to conduct a feasibility study on how successful the business is likely to be under the existing conditions. The objective of this research is investigating how feasible and profitable is it to start a new business. The feasibility study involves among others the following:
Market Analysis
The question that comes to one’s mind when starting a business is whether there is a sustainable market for the product or service you want to offer.
Before one starts a business there is need to investigate whether there is a sustainable market for the goods or services that one wants to offer by assessing the consumers of your products, how many they are and the form they want the product to be in, the price the customers might be willing to pay for your products and whether the market is a permanent one or a seasonal one and the existence of both supplementary and complementary products to your goods and services.
After assessing the above and deeming the results positive then you can move into the next step of investigating who your competitor will be in the market.
Competition Analysis
Satisfaction that you have a reliable market is just the first step in the business development process. After you are satisfied that a reliable market exists, the availability of the market and the possible rivals you are likely to face in the market becomes the next big issue. This is done by analyzing who the direct and indirect competitors are.
The direct competitors are those individuals selling similar products as yours. A deeper knowledge of what they offer, charge, what they do well, and what they are not and the existence of any gaps that you may use to woo customers on your side is very important. Indirect competitors are those other business players who deal with complimentary products to the goods and services you want to offer.
The importance of studying these indirect competitors is that they may be a distraction to your customer pool by offering cheaper complementary products and thus causing a shift from your products to their products thus the necessity. After you have done the above analysis and the playground seems comfortable the next question that comes into your mind is how affordable the enterprise is.
Factors or Costs
Among the worst mistakes that any business entrepreneur can make is underestimating the start up costs and the operating capital required to run the business until the break-even position is achieved. It is always important to make accurate estimates as sources of extra capital in future may be limited. For example if one wants to start a French beans importing business it is very important to make accurate estimates of the required capital both for starting up to the point where the business will break even.
Calculating the set up costs and the working capital
Realistic forecasts boosts one’s confidence and the ability to meet own commitments. When you set the required costs straight it means you won’t require extra capital after the business has started and thus there are chances that the business may run successfully without shortages in the required running capital.
There are many types of costs that a business entrepreneur incurs in the process of starting a business and they include costs of sales, professional costs, administrative costs, transaction costs classified as either fixed or variable costs among others as indicated by Webber (n.d).
With the available cost on one side and the costs that may be incurred on one side, calculating the initial costs gives one a chance to consider the items which are of high necessity and giving them higher priorities compared to those lowly placed depending on the capital available. Accurate estimates reduce the gap between the real budget and the expected budget and thus placing the business in a comfortable position (Anon, 2009).
The working or operating capital is the amount of money needed to keep the business running. For a sustainable business one has to allocate enough working capital in order to ensure the business runs successfully. It is important to factor out the fixed and the variable costs so as to know the required capital.
Fixed Costs
Fixed costs are the fixed expenses the business has to incur irrespective of the sales made. The costs required when investing in the fixed assets such as the cost of machinery or the cost of land among others.
Machinery or plant costs: these are the costs required to buy the required machinery if the business demands one.
Land costs: these are costs of buying the piece of land or paying for the rent if you are leasing the land.
Stock costs: these are the costs required for buying the initial purchases which will be needed by the business.
Variable costs
These are the costs related to the delivery of one’s product or service. These costs usually relate to the activities going on within the business. They include;
Transaction costs: these are the costs which the business will incur during the negotiation process.
Administration costs: these are the costs which the business will have to incur when enquiring about any expertise information that may be required. Others include what the authority will charge you in order to issue you with a license allowing you to start the business.
Wages: the costs incurred when paying the workers or your own salary. Wages vary with the size of the business and the ongoing activities.
Costing and Pricing
When setting prices it is advisable for one to set prices which can cover the costs of production in addition to generating some profit. The business owner should take into consideration the costs which will be incurred during the start up and the running process so as to ensure the product set prices covers everything.
Other costs which should also be taken into consideration are the hidden costs (Garrison, Noreen & Brewer, 2006). Hidden costs are those costs which are incurred during the process of conducting the business such as the transportation cost or the transaction costs many people do not include them but to know the real business situation, it is always advisable to include them.
Measurements
The involved costs will be measured in terms of dollars by measuring the expected costs and benefits and then estimating how long it will take to reach break even point. The break even point is that time when the costs are equal to the benefits and the business is neither incurring profits nor losses. It indicates the costs have all been covered and it is a very helpful point in knowing how long the business will take before it can cover all the costs so as to allocate enough running capital to the business (Holland, 1998).
Analysis
Cost Benefit Analysis
Evaluating quantitatively whether to start the business:
The last step in doing a feasibility test involves calculating the costs and the benefits involved in what is referred to as cost benefit analysis. The method involves simply adding up the value of benefits and then dividing with the costs involved in order to know how long it should take before the business breaks even (Nas, 1996).
Example:
A business man is deciding whether to start a business of importing French beans from Africa. The following are the costs he is likely to incur:
COSTS:
Pay back time: (8000/10500) = 0.7619048.
It will take approximately 9 months to reach the break even point.
Summary
From the above analysis we can summarize by indicating that the above business idea has got higher chances of succeeding. If the entrepreneur would like to reach break even point faster he should find ways of reducing transaction costs or search for more market opportunities in order to increase the revenue earned reducing the fraction further.
Conclusions and Recommendations
When starting a business, there are different types of cost that one must incur before the business can succeed. It is very important to calculate all the estimated costs that may be required in order to avoid surprises. Ensure you have enough capital to help you run the business until it has grown to fund for its own expenses. It is always advisable to talk with the people in the industry and enquire for as much information as important as it may be.
The support of the family is another vital factor that I can recommend for anyone starting the business so that incase of failure at least you may have somewhere to run to. Many people, as they start businesses, do not assess their emotional ability of dealing with some of the challenges that may come up during the start up stage and thus since there will always be the discouragements and the disappointments, prepare yourself psychologically for any outcome.
Reference List
Anonymous, (2009). Helping people build businesses based on good ideas and clear goals. New Zealand Trade and Enterprise. Web.
Garrison, R; Noreen, E; Brewer, P. (2006). Pricing decisions and cost management. Web.
Holland, R. (1998). Break Even Analysis. Web.
Nas, F.T. (1996). Cost Benefit Analysis: Theory and Application. New York: Sage Publications.
Webber, A. (Not Dated). Estimating Startup Costs for a New Business. Web.