Quickly Evaluate Your Business Ideas

The most difficult question for an aspiring entrepreneur, is where to start. First, you need an idea for a product or service that you could earn income with. Even better, have several ideas to choose from. I always recommend that someone follow their passions, and start a company based on something that they love. Money follows passion. Many businesses fail because they were started for the wrong reasons, lack of management skills, distraction by something else that was more shiny, or losing the drive to put in the hard work. When you work within your passions, you are less likely to give up, and more likely to push towards success. Your passions can be identified with one simple question: If you could do one thing every day for the rest of your life, and get paid for it, what would that be?

Barring the wisecrack answers of “Semi-Pro Wine Drinker” or “TV Binge-Watching Expert”, you still have to be realistic with your definition of passions. Is the subject within your skill set, or knowledge capability? Not everyone can be an NFL starting quarterback, or create quantum physics theories. Some level of self-awareness is certainly required. You also have to come up with the idea to earn income from the idea, somehow.

With your business ideas fresh in your mind, now it is time to evaluate each of them individually. To do this, you should first come up with some short-term and long-term financial goals. I recommend 1 year, 5 year, and 10 year goals. Measurable, actual numbers are required here. You will need to define a specific goal that can be quantified and pursued. Saying “I want to be rich” is not a measurable goal. There is no value to measure against, and “rich” is a subjective description that is just based on perspective. A better example of a measurable goal would be “I want to earn $200,000 per year” or “I would like to have $5 million saved in 10 years.” Both of those are good specific goals, as there is a dollar value and a time value within each. This makes them measurable, and you will also know when you achieve those goals. I do not typically recommend just attainable, easy goals. I usually recommend aiming higher, as larger goals are more likely to motivate you, and keep you motivated. When people set goals too low, they get lazy and become content.

With your defined financial goal in mind, you can then reverse-engineer the yearly, monthly, weekly, and daily income required to achieve that goal. This exercise will also test the validity and likelihood of this business idea, to achieve the income level of your goal. Here is an example.

Let’s say you want to open a small store in your town, and your financial goal is to earn $200,000 salary per year. If you do some Google research on the type of store you are interested in, you can find the average Net Profit Margin for similar businesses. Net Profit Margin is the pure profit, after overhead costs are subtracted. Overheads are your building lease, utilities, cost of goods, advertising, reinvestment into the company, employee pay, services needed, and other associated costs needed to operate the company. Let’s assume your business idea usually has an average 10% Net Profit Margin. As a small business owner, that remaining net profit could be the same thing as your personal income.

To earn $200,000 income per year, at a 10% Net Profit Margin, you would need to have a sales revenue of $2,000,000 in products or services per year. For a small business owner, the simple formula is:

Income = Sales Revenue x Net Profit Margin

$200,000 = $2,000,000 x 10%

Now you must accept the potential harsh reality of your business idea. Does it seem possible to achieve the calculated sales revenue, to reach the financial goal of your income dream? If your business idea isn’t scalable, or your potential customer base isn’t large enough, or your competitors have too large of a market share already, it may be very difficult, if not impossible, to achieve the sales revenue that you need to achieve the income you want.

This quick check will tell you if the idea is a waste of your time, or if the idea needs to be refined to improve the potential. You’ll find that many of your ideas do not align with the financial goals you have, as this is quite common. Your choice is to relax those financial goals, or to think of some better ideas. Don’t waste a minute chasing an idea that will never potentially arrive at the goals you have set. Create, plan, and execute only the best ideas to potentially reach your goals, backed with that important passion aspect.

Now, get after it!