Starting a new business can be exciting, motivating, stressful, confusing, fun – the future is in your hands. Or is it?

The sad fact is that many new businesses never reach profitability, and so they shut down, but not for lack of trying. Entrepreneurs, launching a new business, are likely to work hard because they’re investing in themselves and their futures.

With failure rates high, and the costs of opening a start-up even higher, it pays to test your business idea before you put out the OPEN FOR BUSINESS sign.

Here’s how to test your new business idea before you invest time, energy and capital in launching a new enterprise, whether downtown or online.

1. Work it out on paper. Be smart. Don’t float pie-in-the-sky revenues and manageable expenses. Instead, create the worst case scenario.

Many small businesses fail because they’re under-capitalized. The owners have enough money to launch, but if revenues don’t come in as quickly as projected, the business will quickly use up its start-up capital.

Start by making a list of your expenses before you launch. Everything and anything you can imagine, from an attorney to opening day signage.  Pick up the phone and start filling in the blanks with real-world numbers. What does a store in a high-traffic mall cost per square foot? How much does an office copier cost?

Visit with your local bank representative. They are likely to know the area, know your competition, know providers and vendors – you can learn a lot in an hour’s consultation with your bank’s business authority.

Develop a complete list of your expenses for the first 12 months of operation. Then estimate business earnings, but be realistic. In fact, be very conservative when projecting a start-up’s first year’s earnings. There are simply too many variables.

Prepare a formal business plan. Again, your bank rep can help you. There are also free business plan templates on the Internet available for download. A good business plan is based on reality, not expectations, hopes and dreams. Your business plan should detail both opportunities and challenges your new business will face as it gains a foothold in the economy.

Develop a product prototype for owners of potential outlets. If your idea involves a product or products, potential distributors need to see what they might be selling. Develop prototypes of products and packaging. Consider taking space at a trade show where your potential distributors are likely to discover you, and maybe even place an order!

Prototypes can take the guesswork out of the distributors’ decision. You don’t have to describe it or explain it.  Retailers can hold your product idea in their hands or see it in action, simplifying the decision to become a distributor of your products.

Offer product licenses. Companies may prefer to license your products or services, and if not, you’ve gained information on how to improve your products and their delivery.

Companies that license the right to re-sell products in your business sphere recognize attractive terms when they see them. They also recognize earnings potential that doesn’t require a great deal of financial risk.

Licensing products is also an excellent way to network with suppliers,distributors, raw materials manufacturers, retailers, and others involved in the making of the products you sell.

You may not find a company interested in licensing your products, but again, you gain more information when you test a business idea with established businesses that may become licensees of your product.

Test it before you invest in it.

Test your business idea before you invest, using real world, sector-specific information from companies and individuals who already operate in the business realm you’re considering.

Your research should be detailed and come from a variety of sources. By the time you gather and assess all this input, you’ll have a much clearer understanding of your own business idea and a better chance of being successful.

If you want to find out more about opening a small business, please view an on-demand webinar presented by Nevada State Bank through Insights: Starting a Business in Nevada is a step-by-step discussion by a panel of experts of the decisions, paperwork and resources that can help put you on the path to a successful launch.

View the webinar.

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.