Entrepreneurs are almost always brimming with ideas.
(article continues below)
An incident at a workplace, a trip to an exotic location, or a dinner out with clients - these are just some examples of situations in which inspiration strikes.
Clearly, some ideas could translate into successful start-ups, while others prove unpopular with either the market or venture capitalists. So the million dollar question is: How do you tell whether a business idea is worth pursuing? Here are some tips on how to rate your ideas.
1. The product or service appeals to buyers
As a start, you could find out from friends, business partners and existing clients whether the product or service is attractive to them. Essentially, the product or service should add value to the user. You could also run a market research project to assess the potential size of the market.
2. The business idea responds to a gap in the current market offering
Perhaps you are thinking of offering a new product. This presents a good opportunity to capture the majority of the market share and put up barriers to entry. However, you need to be prepared to constantly improve your product in order to maintain your position. Being the pioneer puts you at first place, but only until the competition catches up.
3. Repeatability of business revenue
A product or service that gets repeated sales is one that marks a business venture with high growth potential. The recipe for a successful product is not necessarily one that is unique and that customers consider a must-have. As long as customers continue to purchase it, you can build a loyal following even for a product or service that customers can do without. You need to be clear on the factors that contribute to repeated sales, and continue to boost these factors. For example, it could be due to marketing efforts.
4. Costs are moderately low
The ability to keep the operating costs low and under control will greatly help the firm maintains its competitive advantage. It affects the firm's pricing decisions and its ability to adapt to changes in market conditions. A firm that can keep costs low is more likely to be a high growth firm than one which has little control over its costs.
5. Cash flow projections are favorable
For young firms, cash is of utmost importance. High growth firms typically reinvest a significant amount of profits in sustaining their growth. They need a moderate cash balance (a good figure would be approximately 20% of sales) in order to be able to meet the operating needs of the business. By maintaining a minimum cash balance, the firm is not likely to run into problems of being unable to meet short-term debt requirements.