Analyzing Your Company’s Viability

It’s easy to think of a good idea and assume that everything else will fall into line.  But, how do you really know if your business idea is viable?  What will it cost you to start your company?  Will you run out of money before you reach positive cashflow?  If so, how much more money should you raise?  It all comes down to understanding your cost, and your most accurate forecast of growth and revenue.  Here is a step by step approach to assessing your company’s viability:

1. Come up with 3 to 4 scenarios for launching your company.  Will you launch with a barebones product and ride the strength of one feature?  Will you need a fully functional mega-site to attract users?  Sketch a few scenarios for launching and think about the variables each situation creates.
2. Forecast the staffing required to operate under those scenarios.  Will you need full time IT support?  What about Customer Service?  Who is going to market or sell this product?
3. Forecast the cost in overhead, technology, and staffing.  Once you know your headcount, you’ll know how much office space you’ll need and you can look up prices in your area.  If you know what your basic technology architecture looks like, you can forecast hardware and software costs.  Remember, there are always unforeseen costs.  Make sure you’re not being too optimistic.
4. Create revenue models and reports that you can use to run multiple versions of each scenario.  What happens if growth is slower than expected?  What if you add a feature that doubles page views or encourages customers to order an average of 1.3 units instead of  just one?  Play with these scenarios and compare them against your cost forecasts.

When we perform a Viability Exercise, we deliver the following:

• Scenario Outlines: Detailed outlines of 3 Scenarios for launching the startup, what will be released for each, what revenue models will be employed, etc.
• Staffing Requirements and Org Charts: For each of these scenarios, we will identify the Management, IT Staffing, Operations Staffing, and Sales and Marketing Staffing requirements to support the business.  Deliverables will include multiple Org Charts for each scenario, with specific roles and organizational structure.
• Cost Forecasts: We will forecast the first year cost of operating the business under each of the three scenarios, including:
  • Cost of the staffing requirements using the Bureau of Labor Statistics averages for each position
  • Forecasts of technology costs, including hosting, streaming where applicable, hardware and software licensing, and internal administrative technical costs
  • High-level forecasts of operational overhead, office space requirements, and other administrative costs
  • We will use all of the above to calculate your burn rate throughout, at minimum, the first Fiscal year
• Identify and Document Key Performance Indicators (KPIs): We will identify Key Performance Indicators affecting the business and the metrics responsible for increasing company profitability, we will outline those metrics, assign names to them, and provide detailed descriptions
• Variable Revenue Models: Using the KPIs, we will create revenue model spreadsheets that allow us to manipulate the variables of our assumptions and analyze company performance under varying conditions.  These spreadsheets will be integrated so that the scenarios can be measured against each other whenever a common variable is adjusted.
• Break-Even and Cash Flow Forecasts: We will measure the revenue potential for each of the 3 scenarios through FY01 and beyond, and measure it against our cost estimates to provide a rough forecast of when we believe a positive ROI might be realized for the business.  We will analyze which of the three scenarios are most effective based on the funding, cash flow and business objectives.

Lastly, in expressing the value in this exercise, it’s important to note that we are not just conducting a viability exercise to determine a black and white answer as to whether the business can be profitable.  We are performing this analysis so that we know the most effective way to achieve your business goals, given budget constraints, timelines, etc.  For example, you may know that supporting certain features is very costly and, without performing appropriate analysis, might choose to delay them until later releases.  However, if you estimate a 200% increase in pageviews for an advertiser-supported business based on these engaging add-ons, effectively tripling the inventory available for sale, these costs may be completely justified.  But, if you forecast an advertising sales rep as costing $6,000 per month in base salary, you’ll know that you should not hire this person until you have enough ad inventory available to offset this cost.
 
We feel it is very important to explore, through proper analysis, whether your business is viable, whether you’ll make it through your negative cashflow phase, and whether additional investments will result in far greater returns in revenue.  These are the questions you should be exploring and an analysis such as this one is necessary to effectively answer these crucial business decisions.

If you have thoughts on this analysis or questions, as always, feel free to contact us!

Joey Flores
Managing Partner
 joey@StartupArmy.com | http://www.linkedin.com/in/joeyjflores
Startup Army | www.StartupArmy.com
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Tagged as: cost analysis, revenue forecasting, statup advice, viability exercise