The Viability of a Business
ACTIVITIES ACTIVITY 1: Understanding the concept Ask students to define the concept of ‘viability’ before discussing with them the kinds of businesses they would consider to be viable. Do they simply cover costs, for example, or make profit as well? Distribute the student handout and work through the example with the class before brainstorming with them possible costs and overheads a business owner could expect to face. ACTIVITY 2: Hotel viability Ask students to look through the Activity 2 viability example in the student worksheet and answer the question with the help of the attached Accommodation Revenue Calculator. Students can either work together in groups or individually. The correct answer is Option 2: Go up-market, which gives the highest rate of return on investment over 10 years ($215,000). Students should carry out the following equation to reach the answer after inputting the new costs and pricing figures into the calculator. New revenue potential – old revenue potential = profit increase Profit increase x 10 years - $100,000 investment = return on investment ACTIVITY 3: Putting theory into practise In this activity, students need to assess the viability of a high-end furniture manufacturing start-up in the Nelson region. By going online to www.stats.govt.nz, they should estimate a target market of about 7,000 high-income individuals and families shared between 18 competitors. Given the low overheads and profit benchmark of the business, plus its high gross margin per unit, they should assess the idea as very viable - with the furniture-maker only having to sell 30 units a year. Resources - www.business.govt.nz/tools-and-templates/online-training/finance/financial-forecasts - www.business.govt.nz/starting-up/before-you-decide/is-your-business-idea-viable - www.business.govt.nz/starting-up/before-you-decide/will-your-business-idea-work - www.business.govt.nz/tools-and-templates/educational-resources/assessing-viability/Assessing-Viability_Student-handout.doc - www.business.govt.nz/tools-and-templates/educational-resources/assessing-viability/Assessing-Viability_Student-worksheet.doc - www.business.govt.nz/tools-and-templates/educational-resources/assessing-viability/Accommodation%20Revenue%20Calculator.xls
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The Viability of a Business
- 2. Viability is… … the practical potential of a start-up business idea to survive and grow in the marketplace www.business.govt.nz
- 3. Parameters of viability - Profit - Cost - Price… …and market share www.business.govt.nz
- 4. Gross profit margin is… www.business.govt.nz
- 5. Gross margin per unit is: Price - Direct manufacturing cost per unit www.business.govt.nz
- 6. Required sales volume is: Gross margin Gross margin per unit = Volume www.business.govt.nz
- 7. Market share… …Is the slice of the market your business can potentially take from competitors …Is derived from the target market population and the number and size of competitors in the market www.business.govt.nz
Editor's Notes
- Viability is also defined as “feasibility” and “practicality”.
- It is important not to confuse overheads with manufacturing costs, which apply to the next slide. Annual overheads are always fixed and do not change with the level of production, while manufacturing costs, such as material, can reduce with volume (this is known as the economies of scale).
- Direct manufacturing costs include both material and labour costs.
- For an in-depth look at viability (including interpretation of profit) try the “How much money are you really making” online viability tool at Business.govt.nz (www.business.govt.nz/tools-and-templates/online-training/finance/how-much-money-are-you-really-making).