People come up with ideas for new businesses every day. How does one judge whether an idea has merit or not? Should the business be pursued or should the idea be tossed on the scrap heap of bad ideas? Here is a process you can follow to find out.

A feasibility study is used to test a business concept. It takes into account the strengths, weakness, opportunities and threats (SWOT) of the proposed business’s environment and the resources it has at hand to try to evaluate the business’s chances of success.

The first step is to come up with a hypothetical business model that you can test based on the research and analysis you conduct in the feasibility study. I recommend following the Business Model Generation method.

Next, you would conduct research designed to inform the analysis needed to test the assumptions you made in the business model. This may involve talking to potential customers, gathering information on your market and competitors, and getting quotes on all costs involved, among other things.

Once you have information in hand, you can start your analysis. In general, for a feasibility study, I would conduct the following analysis:

Environmental Analysis

• trend analysis
• industry analysis
• internal analysis (an assessment of your skills vs what the business requires)
• market profile analysis

Financial Analysis

• analysis of similar firms in the industry
• projected market share
• break even analysis
• proforma analysis
• ROI projections
• margins

If you complete the analysis described above, you should be in a good position to make a decision about whether or not to proceed.

If you decide to proceed, you would then create a business plan to describe the day to day operations of your business. Much of the analysis done in the feasibility study stage will be brought into the business plan so it should be relatively easy to create.

A feasibility study is a lot of work and it is difficult to do well, but it is a step than should not be skipped for a business with a new business model. The risks are just too high. It’s better to find out that a business doesn’t work in the feasibility study stage rather than after you’ve invested your hard earned money. While “No, don’t do this” might not be what you want to hear, consider it a set back. There are plenty more ideas in the world. Take what you’ve learned, pick another idea, and take another shot at it.

The book, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, written by Alexander Osterwalder and & Yves Pigneur defines the term business model as:

A business model describes the rationale of how an organization, creates, delivers, and captures value.

This is a very good definition, however I think it is important to understand the difference between a business model and a business plan.

A business organizes its assets and activities into a system that it uses to deliver value to the customer. This system may vary widely from business to business depending on the industry it is in and the approach it is taking. For example, a restaurant has a different business model that a tire shop. This is easy to see. Amazon has a different business model than your local retail seller of books. This might be more difficult to see as they both sell books.

To help explain this difference, I’ve included a graphic from the above mentioned book that nicely organizes a business model into separate areas.

When you look at categories like cost structure, channels, and key activities it becomes clearer how Amazon is different than your local bricks and mortar retail book seller.

Note that the business model gives a thumbnail sketch of how the business will be organized and what it will be doing. It does not provide a plan for how this system will work or how it will be implemented. That’s where the business plan comes in.

What does all this mean for you, the person wanting to start a small business? If you are starting with a business model that has been existence for while and other people are successfully running businesses using it, you can proceed to the business planning stage. If you are starting a business with a business model that is significantly different that what has been tried before or if a particular business model has a short rack record, you should spend time developing your business model. This will often involve conducting a feasibility study to test your business concept.

For 80%-90% of you out there who are looking to start small businesses, a proven business model exists for what you are doing and you can proceed to the business planning stage. The rest of you have a longer road to travel.

The Government of Canada’s Business Services For Entrepreneurs website defines a business plan as:

“A business plan is a written document that describes your business, its objectives and strategies, the market you are targeting and the financial forecast for your business. It will assist in setting realistic and timely goals, help secure external funding, help measure your success, clarify operational requirements and establish reasonable financial forecasts. Preparing your plan will help you focus on how your new business will need to operate to give it the best chance for success.”

This is a good definition of what a business plan is but I think it is important to describe what a business plan is not:

• The business plan is not where you come up with your business idea. This should be completed before you get to the business planning stage.
• It is not for developing a business model. A business model is a system for making money. Some businesses have straightforward business models that have stood the test of time. Some businesses have business models that need to be tested because they are blazing a new trail. Your business model should be settled before you get to the business planning stage.
• It is not a feasibility study. A feasibility study is used to test a business idea to see whether it stands a good chance of becoming a successful business. There is some overlap between a business plan and a feasibility study but studying feasibility is an investigation and not a plan. Lessons learned in the feasibility stage can be applied to the business planning stage.

For an idea that is not unique and has proven business models built around it in other neighbourhoods or cities, a feasibility study may not be necessary. It’s important to understand where you are in the process of starting a business. Trying to complete the process out of order or trying to skip steps will limit your chance at success.

A common topic of discussion with my clients is how much debt is the right amount. This is a big question. Not enough debt can restrict your growth and too much debt can destroy your business. How can you tell if you have too much or too little debt? Since it’s the start of golf season, how about a golf analogy?

A loan is like a high tech, long distance driver to a business. When used properly, it can add distance to your game and lower your score. It can’t, by itself turn you into a better golfer. In fact, a top tier driver in the hands of a wild golfer will increase scores because the off-center hits will result in even wilder misses.

In a business, if you have solid revenues and have good control over your costs, debt can be a great way to make your investment work for you. The increased power the loan provides will greatly benefit your bottom line. If you have fluctuating revenues and are subject to wide fluctuations in costs, the increased power of a loan can wreck you if you can’t make your payments.

The one point where this analogy breaks down is the role of the banks. Yes, they are selling you the loan (driver), but they aren’t overly concerned with your score. It’s more like they are renting you golf balls. As long as you return them at the end of the round (interest and principal payments), they don’t care if you shoot 70 or 105. Hopefully this analogy sheds a bit of light on how your debt structure affects your business. Until next time, keep it in the short grass!

When scouting locations for your new business, you can be beset with a variety of choices. Picking the location for your business is one of the most important choices you will make. Your success or failure rests on this. This blog will give some insight into what the important considerations are.

Where are your customers? This is by far the most important consideration. You need to be where your customer can reach you when he is in a buying mood. For example, putting a family restaurant in the industrial section of town is a mistake. In order to make the best choice, you need to know your customer. Where do they currently get the product or service you wish to provide? If you miss this, you could have the best product, best customer service and satisfaction and still fail. It’s like the philosophical question “If a tree falls in the forest and nobody is around to hear, does it make a sound?” In the case of a poorly located business, the sound is your cash register, and the answer is NO.

Do you want to buy or lease? Unlike the first question, there is no simple answer to this. Leasing is an attractive option for owners without a lot of cash. It also is good if the lessor can attract your target market. Buying is a better option for those with ample funds because owning tends to be less expensive than leasing. In addition, as the owner of the premises, you have much more control over what happens to your store. New lessors can’t come in and force you out if you own the property.

How much do you want to pay? Obviously, your capital or lease payments have to fit in your business plan. Unfortunately, many entrepreneurs look for the best rate or price as the first consideration in picking locations. The trouble with this is if you choose a location where there isn’t a market, the location could be free and the business would still fail. If you can’t raise the capital to get into the right location, the best choice is to raise more capital. Choosing your location based on price will be the undoing of your business.

Choosing your location is vital to your success. If you use these three considerations, you should have a good chance of making the right choice.

The Canadian Youth Business Foundation (CYBF) has partnered with Spinmaster to launch the Spinmaster Innovation Fund. The fund will offer financing, mentoring and support for up to 10 young entrepreneurs.

Spinmaster was started by three Toronto entrepreneurs in the mid 1990s. The company has grown to be a successful toy maker, well known for its Air Hogs line of toys. The founders have decided to partner with the CYBF to give back to the entrepreneurial community.

Each entrepreneur will be eligible for up to $50,000 of startup financing. There is no collateral required and there are no principal payments required for the first year of the loan’s amortization. Interest rates start at Prime + 2.0% and can decline over the life of the loan should all payments be made on time. A loan with these terms and interest rate is a very good deal for the entrepreneur. Typical bank financing for this type of business would likely require collateral with a much higher interest rate.

Each of the entrepreneurs will receive mentoring through  the CYBF’s mentoring program. They will also have access to some of Spinmaster’s executives during the first two years of operating their business. The successful entrepreneurs will be given a paid trip to Toronto for a two day Innovation Launch Pad Workshop where they will be taught business skills by the Spinmaster team.

The application process is as follows:

1. Call For Applications - CYBF will start taking applications on April 27th, with the call for applications closing on June 9th, 2011. Each application will require a business plan.
2. Application Review - The evaluation committee will review applications throughout July and August. They will narrow the applicants down to 18 semi-finalists.
3. Pitches - During August 17th & 18th, the finalists will pitch their presentations to the selection committee.
4. Innovation Launch Pad Workshop - The 10 winners will be announced and they will attend the workshop on September 24th & 25th.

The contest is open to Canadian entrepreneurs 18 to 34 years of age. The business must have been in operation for less than a year and it must have a business plan with good prospects for profitability. The business must be majority owned by qualifying age individuals. The applicants need to work in the business full time and cannot be full time students.

The application process is fairly straightforward. The entrepreneur will need a business plan prepared according the CYBF’s template, resumes for each individual applying and a couple of references. There is an online loan application that will also need to be filled out.

For any of you young entrepreneurs out there, this a contest worth entering. The financing is a sweetheart deal, you’ll have access to the mentorship of the entrepreneurs behind Spinmaster and the contest exposure can only help your business.

For further information check out the CYBF’s Spinmaster Innovation Fund website.