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How To Start A Business - The 5 Crucial Stress Tests
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How To Start A Business  -  The 5 Crucial Stress Tests

You're wondering "how to start a business". You have an excellent list of new business ideas and you want to know how to pick the best home business to start.

Whether you're starting a business on line or off line; whether you're a global corporation or just looking for the best home businesses to start, the new business ideas need to be stress tested prior to investment of capital and time to ensure it has the greatest likelihood of sustained success.

These are the crucial stress tests involved in selecting the best business idea. My criteria for best new business ideas are ones that are immediately profitable, with strong positive cash flow, with a relatively long business life and opportunities for franchising or at least being sufficiently independent of you for a successful sale.

Stress Test 1 - Determine Demand

Stress Test 2 - Determine Supply

Stress Test 3 - Profitable

Stress Test 4 - Positive Cash Flow

Stress Test 5 - Scale-ability

Stress Test 1 - Determine Demand

While it seems pretty obvious that for a business to succeed, there must be demand for the product, I consider it necessary to focus on this very issue. Too many start ups fail because they believe they lacked start up capital. What they lacked was demand for their new product or service.

Taking on a project to educate consumers is far too costly for mere mortals. The investment in changing consumer taste and behavior, to persuade customers that the new product will add better value to their lives, is hugely expensive and best left to corporations who can afford to lose the capital.

My recommendation for a small start up, is don't do it unless there is existing demand.

Stress Test 2 - Determine Supply

Whether on line or off line, the best home business to start is one where there is high demand and low supply. Pricing is a function of the availability of supply.

Your research will need to include:

  • Who's your competition?
  • Where are they located?
  • How do they work their business?
  • Can you do it better?
  • Can you source a better product/ cheaper product/ provide better service/ provide better value?
  • Is there room in the market for another supplier, you?
  • Is the business subject to technological changes, obsolescence?
  • Are there likely to be new competitors from a cheaper supply source?
  • Is this business subject to demographic changes?
  • Will there be fewer or more buyers as boomers age?

Stress Test 3 - Profitable

This is the driver in any business. Even non-profit businesses budget for a small profit. The objective, of course is to have revenue greater than expenses.

The stress test here is to work out from steps 1 and 2, if there is a sufficiently large demand for your product or service in enough volume and at a decent margin that will cover your overheads, your salary and create some profit.

Profit is especially important if your exit plan involves selling your business. You will need to prove that your business can sustain a profit for at least 3 years an on an exponential scale.

Profit is also seen to be the return on capital invested. This is the opportunity cost of investing your capital reserves in the business rather than in bonds or shares or simply on deposit. Your money has to work for you.

When will be new business be able to repay the seed capital?

Stress Test 4 - Cash Flow

Positive cash flow is not profit.

Cash flow is the difference between money flowing into the business and money flowing out.

Profit is the measure of sales less operational costs. These costs do not extend to purchases of equipment, stock, repaying loans, paying tax bills, putting money aside for rental bonds, and the like. If your potential business is capital intensive or requires regular updates to technology or hardware, planning your cash flow is vitally important.

How will you fund improvements if not from profits and revenue?

Warren Buffet, the world's richest man, says the best businesses are ones that do not require continuous maintenance and problems with obsolescence. He says for example, his airlines are a nightmare and his best business is the candy factory - it's been the same machinery for decades and it is a pure cash in-flow business.

Stress Test 5 - Scale-ability

Michael Gerber, the author of the best selling books, E-Myth and the E-Myth Revisited, tells us bluntly that the problem with most businesses is that they're run by technicians who've hung out the shingle. These people remain technicians and are not entrepreneurs.

Gerber warns that businesses like that become just another job, another means of making money to pay the bills. These businesses do not become assets.

The best home business to start is one that has the potential to function without you - that is when it becomes valuable.

It requires systems and processes.

It requires documentation and formalization.

It needs to be replicable.

Do your new business ideas have the potential to be scaled and replicated? Business that are scale-able are able to be sold at higher multiples as they are more likely to be franchise-able.

Summary

So, the first step in how to start a business? Assuming sustained profitability is important to you, start by considering the 5 crucial stress tests above.


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