Evaluating Business Ideas (Leaving Cert Business): Revision Notes
Evaluating Business Ideas
When developing any business idea, it's crucial to determine whether it's actually worth pursuing before investing significant time, money, and resources. This evaluation process helps entrepreneurs make informed decisions and avoid costly mistakes.
The evaluation process is often overlooked by eager entrepreneurs, but it's one of the most critical steps in business development. Taking time to properly assess an idea can save thousands of dollars and months of wasted effort.
What is a feasibility study?
A feasibility study is a systematic investigation carried out to assess the commercial viability of a business idea. This research examines whether the proposed solution is possible to create, determines production costs, and evaluates market demand for the product or service.
The main purpose is to answer three critical questions:
- Can we actually make this product or deliver this service?
- How much will it cost to produce?
- Is there sufficient demand to make it profitable?
These three questions form the foundation of any business evaluation. If you cannot answer "yes" to all three with confidence and supporting evidence, your business idea may need significant revision or should be abandoned.
Types of feasibility studies
Production feasibility
Production feasibility examines the practical aspects of creating your product or service. This investigation considers several important factors:
- Materials and resources: What raw materials, equipment, or technology will be needed?
- Technical requirements: Can the product actually be manufactured with current technology?
- Safety and legal standards: Will the product meet consumer protection and industry regulations?
- Quality standards: Can the proposed solution consistently meet customer expectations?
A key element of production feasibility is creating a prototype - a first mock-up or sample of the product. This allows entrepreneurs to test whether their solution works in practice and meets customer needs. Remember, successful products must be desirable (customers want it), feasible (can be made), and viable (can be profitable).
Worked Example: Production Feasibility for a Smartphone App
Step 1: Technical requirements
- Can we code the app with current technology? ✓ Yes
- Do we have the programming skills needed? ✓ Yes
Step 2: Resources needed
- Development software: $99/month subscription
- App store fees: $99/year registration
- Testing devices: $500 estimated cost
Step 3: Legal and quality standards
- App store compliance requirements ✓ Achievable
- Data privacy regulations ✓ Can be implemented
- User experience standards ✓ Prototype testing shows good usability
Financial feasibility
Financial feasibility involves conducting a detailed cost analysis to determine the economic viability of the business idea. This analysis includes:
- Fixed costs: Expenses that remain constant regardless of production volume (rent, equipment, insurance)
- Variable costs: Expenses that change with production levels (materials, labour, packaging)
- Revenue projections: Estimated income from sales based on market research
- Profit calculations: Determining whether revenues will exceed total costs
This financial analysis helps entrepreneurs understand the investment required and potential returns, enabling them to make informed decisions about proceeding with the venture.
Financial feasibility is often where promising ideas fail. Many entrepreneurs underestimate costs or overestimate revenue potential. Be conservative in your projections and always include a buffer for unexpected expenses.
Importance of carrying out feasibility studies
Predicting future success
Effective feasibility studies help businesses determine the future success potential of a product or service. They enable companies to:
- Predict future costs accurately
- Estimate possible sales volumes
- Assess market size and opportunity
- Identify potential challenges before they become problems
Focused decision-making
Specific feasibility studies provide targeted insights that allow entrepreneurs to focus on particular aspects of their business idea. Rather than considering all possible outcomes simultaneously, they can examine individual components systematically. This investigative approach should be conducted before creating a comprehensive business plan.
Many entrepreneurs make the mistake of writing detailed business plans for ideas that aren't actually feasible. Always complete your feasibility study before investing time in comprehensive business planning.
Understanding the bigger picture
Feasibility studies force companies to examine the broader business environment first, then focus on specific details. This approach helps identify:
- Customer needs and preferences
- Competitive landscape
- Production requirements and constraints
- Target market characteristics
- Cost structures and profit potential
Alternative solutions
The evaluation process often reveals alternative solutions that may be more viable than the original idea. This gives companies opportunities to refine their concepts before committing significant resources to ideas that may not be financially sustainable.
Key benefits for entrepreneurs
Conducting thorough feasibility studies provides several advantages:
- Risk reduction: Identifies potential problems early in the development process
- Resource allocation: Helps determine optimal use of time, money, and effort
- Investor confidence: Demonstrates thorough preparation when seeking funding
- Strategic planning: Provides foundation for developing comprehensive business plans
- Market validation: Confirms there is genuine demand for the proposed solution
Key Points to Remember:
- Feasibility studies are essential investigations that assess whether business ideas are commercially viable before significant investment
- Production feasibility examines whether you can actually create the product, while financial feasibility determines if it can be profitable
- Always create a prototype to test your solution - it must be desirable, feasible, and viable
- Conduct feasibility studies before writing business plans to avoid wasting resources on unworkable ideas
- Use these studies to identify alternative solutions that might be more successful than your original concept