Step 3. Calculate the Return on Investment (ROI)

In step 2, your research inevitably helped you to identify key determinants of your business. A determinant is simply a factor or component relevant to your business. In this step, you will use this knowledge to create a financial spreadsheet, which may be called a “pro forma” or simply “financials” by other business folk. Remember the flowchart you started in Step 2? The information you entered into the chart can be very helpful in creating a spreadsheet.

Each determinant you have identified becomes a line item on your accounting spreadsheet and will result in outputs or financial cash flows—either positive or negative. For example, your research may have turned up valuable information about the typical cost to a consumer of your proposed service or new product. Once you enter this information into your spreadsheet, you have essentially estimated how much income you will achieve from selling each item or service unit. Similarly, your research probably helped you determine the necessary components of your product or service and the cost of each component. Entering all of the component costs into the spreadsheet will help you estimate the total cost to create your new product or service. Once you have entered all of the determinants, you can quickly begin to weigh the costs and benefits of starting your new business or manufacturing a new product: in short, you can calculate a return on investment.

The more detail you can add to the spreadsheet—especially in terms of start-up costs—the better the picture you will have of the costs and benefits on a short-term and long-term basis. What you are trying to achieve is a realistic picture of what it will cost you to launch your business and how quickly that business will return your investment. That said, if you decide to launch, you will revisit your financials many times to refine and expand your ideas—so you will have other opportunities to improve your first draft.

Make a decision to move ahead or hold

After completing the three steps we have outlined, you should be ready to make a decision to move ahead to launch your business, hold up for a future launch, or abandon your idea. Whatever you decide, you have made a decision based on solid information. If you decide to put your idea on hold, revisiting the three steps when you are ready to move forward will produce new information based on the market conditions at that time. In fact, the process of moving through the three steps can open up new avenues for products or services for a business at any stage. Coming in the next Calacles Blog: “I’m launching a new business—what do I do first?”

Part 1 of To Launch or Not to Launch

Part 2 of To Launch or Not to Launch

Step 2. Become an Expert

Before beginning a new business, there is no substitute for research. Your goal should be to fully understand the business space you are thinking of entering. To do this, you have to become an expert so that you can assess the positive and negatives aspect of your idea. As you move forward on your research, you want to examine both qualitative and quantitative aspects. There is no such thing as doing too much research. If you imagine that you are on a discovery mission and that your role is to uncover both obvious and hidden information, you will explore all avenues related to your business idea—and, hopefully, carefully document the information and where you found it.

To begin, you should identify all of the competition you will face in your new business. For each competitor, you want to identify relative market share, production cost(s), distribution, consumer price(s), product reviews and consumer feedback, search rankings, and possible vulnerabilities. You want to think deeply about the competition and if and how your business can successfully vie for market share.

Research can also assist you in identifying what your business will require in terms of resources and material sources. You can develop a flowchart for creating a new product or service and insert real costs based on real sources. Research may lead you to manufacturers of components or similar products or suggest alternative ways to create a product. As you carry out your research, you will have the opportunity to talk with other business owners or vendors—this can be invaluable as you develop an understanding of your prospective business.

At the end of your research, you should have developed a robust understanding of the nitty, gritty details of your new business. You should be able to confidently estimate the costs associated with your business as well as the potential income. As an expert on your idea, you will know the potential benefits and liabilities of launching your new business.

Read Part 1 of To Launch or Not to Launch