When is a business viable?

July 13, 2011 | By More

One of the first few questions to ask of a start-up is whether it is ‘viable’. This question is also applicable to mature companies too. But what does it mean? And how does one ascertain a business’ viability?

Taiwan's Cardinal Blue startup Co-founders John Fan and Ching-Mei Chen presenting their business at Echelon 2011. photo:TechOrangeGlobal

The most common interpretation is whether it will ‘succeed’. However, that only postpones the question to: what does ‘succeed’ mean? Alternatively, if the company is ‘making money’, it is not necessarily ‘viable’ either because if it is also hemorraging cash, sooner or later it will run out of money and have to close down.

Ultimately, the surest way to know if a company is ‘viable’ is to make profit – its income revenues being greater than its expenses.

Whilst this is easily determined for a ‘going concern’ i.e. a company already operational, this is hardly a fair way to assess a company that has not yet, or still in the process of, starting up. But how long do we give it? Or asking the same question in another way: how can we find out whether a start-up’s business plan is viable?

So let’s get back to our original definition: a viable company is also a profitable company. Profit equals revenue less expenses.

In its business plan, we therefore want to know that the founders have an approach to generate revenue.

Promising startups at Echelon 2011 in Singapore, Asia's hottest startup conference

So, what is the product or service the company is proposing to develop? Does it make sense? i.e. Is it solving a problem that people want to pay for? Is it realistic? i.e. That this solution can be developed and that there is a good chance of being bought (being unique or somewhat unique helps). Do they know who are their customers and how to reach them? (Read more about: Don’t make a product to sell.)

Too often this is the only part of the equation being looked at. That will be a mistake. We also need to consider what it takes to develop the product or service, and the market. The expenses portion of the profitability equation.

What is the cost or complexity of you putting together your idea or solution? Building everything yourself may take a long time and a lot of resources. Is there another way? How strong are the competitors already in the market and where are the potential customers? This will determine the amount of marketing dollars needed to reach your buyers and inform them of your solution.

All this takes time and money. The longer it takes, more money (expenses) is needed – the less viable the business becomes because the market may change, competitors may enter, and you will have underestimated the effort needed.

An industry panel discussing the viability of mobile payments business

In summary, to determine whether a start-up business is viable, we need to talk to its founders or look at its business plan and consider if the business has:

  • A clear definition of the product or service being developed;
  • A clear problem this is solving, and why this approach is better than existing alternatives;
  • A clear idea of who needs it;
  • An idea of how and how much customers will pay for it;
  • And a plan how all this will be done.

The only thing that remains is to step back and see if the forecast revenues can exceed the effort (expenses) needed to do it – i.e. if the plan is viable.

Without taking the above approach, any spreadsheet can always make revenues exceed expenses but will not be based on a critical analysis of the business. (Read more about: The Practice of Thinking Critically.)

A document with all this included is called a business plan. (Read more about: How to write a business plan.)

Doing all the above does not guarantee the business will be wildly successful, just viable. The rest is based on 3 things: execution, execution, and execution. That is a topic for another time.

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About the Author ()

EngTong, pioneer and innovator. Graduated from Imperial College London with an MBA from Cranfield School of Management. Lived in Scotland, England, California, Beijing and led teams in Italy, France, Japan, Taiwan and Malaysia to do the impossible. Now based in Singapore and believes the future is to blend the sophistication of western management practices with the strength of Asian Values. Trained as a Chartered Engineer. Member of IET, Associate of City and Guilds and a certified SixSigma Champion.

Comments (1)

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  1. how to start a business says:

    Thanks for sharing your thoughts about echelon 2011.
    Regards