Most people do not take kindly to it when somebody, whether a financier or business advisor, has to tell them that their business concept is not viable.
Brilliant business ideas do not necessarily make a good business. It boils down to whether the ideas can be implemented with ease and can generate a lot of money.
I, sometimes, feel sorry for the men and women at finance institutions who have to face zealous entrepreneurs every day and say NO to their applications for funding due to viability problems, knowing that entrepreneurs seldom take no for an answer.
These poor people get accused of lacking the willingness to assist small business owners and are sometimes told that they know nothing about business.
Usually, start-ups are where most of the problems lie. How would you confirm that the business will not be viable?
Remember, there are no past records to analyze and assess except for the business plan and the entrepreneur. People tend to think that a business plan compiled with the assistance of a business consultant will easily secure you funding, not so.
Assessing viability of a business concept is not so simple since one looks at it in terms of market, technical, organisational and financial issues.
These are mainly covered by a feasibility study done before the business plan is compiled.
On assessing market viability one looks at the industry and market conditions at present, the growth potential and the level of competition.
Also very important – the entrepreneur must be able to identify, by name, who the customers will be, how many quantities of the product or service will they order, at what price and how frequent the orders will be made.
This must be supported by evidence and if it is not available then it will be tough to convince another person that the product or service will sell.
On technical viability the assessment is on how intricate the process of producing a product or service is, how easily available are the raw materials and machinery (where applicable) and where they are going to be sourced from, at what prices, the technology to be used whether is new or obsolete and its lifespan, the expertise available in terms of production and servicing machinery, if raw materials and machinery will be imported the impact of the weak Rand on the business, what extent of technical compliance is required for the business and etc.
The more technical the business is, the more difficult it will be to prove viability.
When assessing organizational viability one looks at the way the business will be organized in terms of premises, departments, management and key employees to confirm that the business concept will be implemented with success.
Bad choice of location and premises will always affect the viability of the business. Organizing the business around the owner is a recipe for disaster since if you take him or her out of the equation the whole thing will collapse.
There are key managerial positions in a business that cannot be compromised such as general manager, financial manager, sales manager and production manager in case of a manufacturing business.
On the employee level there are also positions that are key to the production of the product or service that the business cannot function without.
The financial viability assessment brings all the above elements together and translate these into figures.
This is where the final decision is made. Is the start-up capital required ridiculously high, is the entrepreneur able to make a significant contribution in terms of own cash and collateral in order to lower the gearing and get finance at a cheaper rate, can the business afford to repay the loan, are the sales as verified going to be sufficient to cover all the costs and produce profit, are the exchange rates going to have a negative impact on the production costs and pricing of the product/s, are the salaries of employees going to be too high for the business to afford and is the business going to have enough cash reserves to carry it through bad times?
These are the kind of questions that will give an indication of whether the business will be viable or not. Cutting corners will not make a business viable.
If your feasibility study and business plan has been done right for your business concept, you should know whether a NO response received from a financier is genuine or not.
Whoever gave you the idea that it is easy to start a business might have misguided you since it can be a complex process depending on the nature of the business. On the other hand, for an existing business it is easier to determine whether the business is viable or not, since the facts are there.
Don’t just hang in there with some hope that something big will come up and turn the business around. Make sure that your business is viable.