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Four ways to determine if your business idea will be profitable

March 24, 2016

Many business ideas start as a spark of inspiration, followed by months or even years of research and preparation. There are lots of decisions to make before you take the plunge and start your new business. One of the biggest questions that often pops up is, "Will my business idea be profitable?" After all, the last thing you want is to invest time and money into an idea that is destined to fail.

This is where a solid business plan comes in. Doing the research necessary to create a business plan will provide answers to most of the uncertainty. The business planning process, however, can be long and challenging in itself. That why you should try to get an idea of the probability of success before your plan is fully baked. While there isn't an all-knowing crystal ball, there are several actions that will give you a clue about what the future holds for your business idea. Start with these four:

Map out the financials
Do you know what it will cost to get your business up and running? What about the cost of staying in business, and how much you need to bring in to not only cover expenses but also to make a profit? It's important to create a financial forecast that details all of your anticipated expenditures and your revenue goals. This guide to creating financial projections for a startup is a great place to start.

Understand your target audience
Who are your ideal customers? Where do they live; what do they like to do; how do they make purchases; what is their income; what is their lifestyle like; do they have families? By doing a demographic and psychographic exploration of your target audience, you can get an idea of the demand for your products and services as well as potential price points.

Get to know the competition
What other companies are operating in your industry and targeting a similar audience? The first step is learning the answer is to create a list of potential competitors. Once you know who you are up against, do a SWOT analysis to measure the strengths and weaknesses of your competition.

Define your points of differentiation
What makes your business different and better than the competition? Conduct a SWOT analysis on your own business idea so you can see how you measure up to the competition. Writing a unique selling proposition is another useful exercise that helps you differentiate your business from the competition.

Once you have information in these four areas, you will know if the time is right to start creating your business plan. And now for the best part: Once you are armed with this information, you will have a significant chunk of research for your business plan ready to go. This business plan outline and these business planning tools can help you take your business idea to the next step.

Want to learn more? Read more tips from Alyssa Gregory.

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