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  3. Financial Analysis of Business Idea (Overview)
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  3. Financial Analysis of Business Idea (Overview)

Financial Analysis of Business Idea (Overview)

Financial Analysis  (Generally)

This part of the feasibility analysis involves evaluating the potential profitability of the venture. That is, does the proposed business have the potential to return sufficient revenue in excess of costs so that it is financially feasible? So let’s take a look at the information you have and the information you will need.

  • Within the market analysis portion you acquired sufficient information to estimate the potential revenue from creating a business around your idea.
  • The operational analysis provided you with an understanding of the resources required to undertake the business venture.
  • In this section you will need to determine the costs associated with operations and compare those against the expected revenue.

If the venture produces a sufficient level of revenue as compared to the operational costs, then the idea may be feasible.

The Analysis Depends Upon Your Intentions? 

Many intended business owners, when evaluating the financial possibility for a business idea, evaluate if or how soon a business will produce a profit and how much of a profit. This approach make sense for the lifestyle business owner. She is looking for a business that will provide continued annual earnings and will support her lifestyle.

Startup entrepreneurs evaluate a potential  startup venture differently.  Note, the last sentence of the introductory paragraph. I write that the business must produce a “sufficient level of revenue as compared to the operational costs”, rather than, “must produce a profit.” The reason for this goes back to our initial definition of a startup venture.  Remember, startup entrepreneurs (as well as outside equity investors) seek to make money through an exit event (such as selling the business or the equity interest in the business) at a future date. She does not want to report a profit in the early stages of the business if this money would help the business grow more quickly if reinvested in the business. Generally, a business cannot grow to its potential and turn profitable in such a short period of time. For this reason, startup ventures typically report significant losses during the initial stages of operation. The key metric that the entrepreneur must evaluate is whether, once the business has reached its growth plain, will the revenues exceed the costs of operation by a sufficient amount to justify the effort and risk involved in undertaking the venture?

In summary, the entrepreneur must evaluate the potential of the business at later stages of development (devised from the marketing plan) against the costs of operations at different stages of business growth (devised from the operations plan).  If the comparison reveals the opportunity to create a business with significant growth potential that outpaces the rise in costs that accompanies such growth, then the idea may be a feasible business opportunity.

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