Article by Gene Muchanski, Executive Director
Dive Industry Association, Inc.
The feasibility study is the point in your decision-making process where you gather enough information to determine if there is any financial reason for starting your own business. Until now, you have considered internal factors centered around you and your circumstance. We asked you to be truthful with yourself and ask: What is my reason for starting a business? Do I have a convincing enough purpose that will benefit the existing industry? And as discussed in the last chapter, do I have what it takes to perform well and succeed in my new venture? Now it’s time to look outward to the market you will be competing in and serving. Yes, serving.
My advice in conducting a feasibility study is to keep it simple and do it. At this point, there are no right or wrong answers, and your research is still not costing you anything except your time. If your research suggests there may be a flourishing business in your future, there will be plenty of time to gather the details you need to build it. Enjoy the process, but try to be as realistic as possible.
A Feasibility Study is about knowing if there is a suitable market for what you will sell and if you can sell enough units. I think running a business is about Products, Customers, and the Market. Before we get into the market, you have to ask yourself, Can I sell a significant number of profitable products to a substantial number of profitable customers to be successful? If the answer is yes, we can dive into communication and answer how we intend to reach our potential customers and get them to purchase what we sell. Building a better mouse trap may be great, but you still need to know how you will get enough customers to beat a path to your door. So, let’s begin.
Products: Businesses sell programs, products, and services. They are measured in units, so let’s call them products or units. Products are produced to solve a need of the person who buys them. There are good products and not-so-good products in the market. You have to decide which products you are going to sell. Products have to work. They must do what you say they will do when you sell them. They also have to be profitable to you. To stay in business, you have to sell them for more than they cost you so that you can cover your expenses. We will get into that later.
In our Business Start-up book, we use a Microsoft Excel spreadsheet to estimate the cost and profitability of the items we sell. Please keep it simple now and expand on it later, when necessary. It would be best to list what you plan to sell in your business, followed by what you will charge. The next column will be your estimate of how many units of that product you expect to sell in one year. If you break it down into months, it makes it easier to estimate due to seasonal variation. Do this for everything you sell. When you are finished, you will have two critical knowns. 1) Estimated sales per unit and 2) Estimate sales in dollars. If you are adventurous, you can add a cost column. You will receive a profit per unit sold by subtracting your cost from your revenue. Looking at your spreadsheet totals, you now know how much sales, revenue, expense, and profit your business will generate. But no worries, this is just the beginning.
Customers: Now, let’s look at our potential customers. A customer is a person who needs your product because it will satisfy a problem or a need they have. Scuba diving could be a social need, an employment requirement, or a professional necessity. It also could be as simple as just plain curiosity. Besides a need for your product, a customer must also want it, be able to afford it, and be willing to trade their resources for it. And not all customers are good customers. Besides the small percentage of bad customers, I tend to look at potential customers as good, better, and best. They usually come to you as potential good customers, and it is up to you to help them elevate their status to the best. But maybe we are just getting a little ahead of ourselves at this point. For your feasibility study purpose, we would be happy with just knowing the raw numbers of customers you can attract.
Customers are one-time, repeat, or lifetime customers (the number of years is variable). Knowing how many customers you plan to serve is essential. Knowing what they buy from you is just as important. Customer purchases are measured in units. We call them units sold. Since you already have completed a products spreadsheet, adding in the sales in units from your customers’ estimated purchasing activity is a simple addition. Now you have a better understanding of how many customers you will have and what they will be purchasing from you. Are you OK with that? Does it seem more or less than you thought it would be? Again, no worries. This is just the first pass.
Your first pass at creating a Feasibility Study is usually an eye opener. It makes you think in more detail, and it often creates more questions than it provides answers. The first time you do it may be a bit overwhelming, but like riding a bicycle, the more you do it, the better you get at it. As a small business consultant helping hundreds of start-ups through the feasibility study and business plan process, I used four spreadsheets to make the process less painful for new entrepreneurs. The project started as a feasibility study aid and developed into a sales forecasting template. The first spreadsheet calculated Sales in Units Sold. The second spreadsheet was automated, producing Sales in Dollars. The third spreadsheet was also automated, based on spreadsheet #1, measuring the Cost of Units Sold. Data from spreadsheets 1, 2, and 3 fed into spreadsheet #4, the Pro-Forma Profit & Loss Statement. These spreadsheets were easy to replicate for new clients and gave us a future look into our forecasted sales’ effect on the company’s revenue, cost of goods sold, and gross profit.
Thinking back to my Amway days, after we tried to sell to our family and friends, we moved on to our neighbourhood and beyond. We are looking to answer the question: Are there enough potential customers in our market who will buy from me? First, we must look at the market. A market is made up of buyers and sellers. You are the seller. Are there enough buyers for your new business to succeed? The market is also made up of other sellers besides you. They are called competitors. They are in the same market as you are and will also be looking for new buyers, hopefully not the same ones you will be bringing in. We will address that in more detail in future chapters.
For now, we should add all the existing customers already in the market to the new customers you will be creating to give us an estimated number of customers you will be dealing with in your first year. Based on the number of products you hope to sell and the number of customers you wish to sell to, will that be enough to make you still want to go into business for yourself? If the answer is yes, then we can move into the process of collecting enough data to help us make a more informed decision. If the answer is no, we have just saved ourselves a lot of time, money and human resources on a bad idea. In future articles in this series, Starting Your Own Business, we will detail the programs, products, and services sold in the recreational diving industry. New business owners and established dive businesses need an industry source for acquiring diving equipment, training programs, travel services, and lifestyle products. The Dive Industry Association publishes an International Trade Directory & Cross-Referenced Buyers Guide. The publication is updated monthly and is available to every Dive Industry Professional worldwide. If you are an established dive business selling to the retail or wholesale trade, you need to be in this publication.
For more information on conducting a feasibility study, as it relates to a Dive Industry Professional Business, contact Gene Muchanski, Executive Director, Dive Industry Association.
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