Chapter 4 THE VIABILITY OF A BUSINESS IDEA

CONTENTS PAGE

4.1 LEARNING OUTCOMES

4.2 KEY CONCEPTS

4.3 A MIND MAP FOR CHAPTER 4

4.4 OVERVIEW

4.5 THE VIABILITY OF A BUSINESS IDEA

4.5.1 Why do we do a viability study?  575

4.6 THE MARKET POTENTIAL OF A BUSINESS IDEA

576 4.6.1 Step 1: Do market research
577 4.6.2 Step 2: Establish the needs and characteristics of consumers
578 4.6.3 Step 3: Determine the mission and objectives of the enterprise
579 4.6.4 Step 4: Do a market analysis

4.7 THE PROFIT POTENTIAL OF A BUSINESS IDEA

581 4.7.1 Step 1: Calculate the expected income
582 4.7.2 Step 2: Do projections

4.8 WHEN IS AN IDEA VIABLE?

4.9 SUMMARY

4.10 SELF-ASSESSMENT

4.11 SUGGESTED SOLUTIONS TO THE SELF-ASSESSMENT QUESTIONS

 4.1 LEARNING OUTCOMES

When you have worked through chapter 4, you should be able to

 explain the answers that the market research should provide

 explain the method that can be used to establish whether there is a need
for a specific product or service
 define the mission and objectives of an enterprise
 list the four segments into which the total potential market can be divided
and give examples of each segment
 explain what a target market is
 compile a SWOT analysis for an enterprise
 list and explain the two factors that determine the size of the expected
market share
 list the three scenarios for which the expected market share should be
calculated, and explain why we must calculate the expected market
share for these three scenarios and the purpose for which these
calculations are used
 explain the components for classifying costs
 explain the different methods of calculating the total cost per unit for a
manufacturing enterprise, a commercial enterprise and a service
enterprise
 explain what factors should be considered when we calculate the selling
price of a product or service
 explain what a pro forma income statement is and how to calculate the
expected gross profit and the expected net profit
 explain what the break-even point is, how it is calculated and how it can
be lowered
 explain the importance of having enough cash available
 define a cash budget and explain the purpose and components of a cash
budget

4.2 KEY CONCEPTS

You will need to master the following key concepts to achieve the learning outcomes
for this chapter:

 Viability study
 market research
 mission and objectives
 total potential market
 market segmentation
 target market
 SWOT analysis
 market share
 fixed and variable costs
 direct and indirect costs
  total cost per unit
 cost price
 selling price
 pro forma income statement
 break-even point
 cash budget

4.3 A MIND MAP FOR CHAPTER 4

THE PLANNING STAGE

THE VIABILITY STUDY

MARKET POTENTIAL PROFIT POTENTIAL

Do market research Calculate the expected

income

Establish the needs and Calculate the total Calculate the

characteristics of cost per unit selling price
consumers

Determine the mission

Do projections:
and objectives of the
1 . Pro forma income statement
enterprise
2 . Break-even point
3 . Cash budget

Do market analysis:
1 . Determine the potential market
2 . Determine the target market
3 . Determine the expected market share
4.4 OVERVIEW
This chapter deals with the essence of a viability study – the importance of
estimating the interest in the enterprise and its offering, the expected sales in units at
a certain price and the different costs involved. You will also come to terms with the
importance, meaning and necessity of a SWOT analysis to test the viability of your
business idea. You will learn how market research is done, what market
segmentation entails and how to determine the expected market share of your
potential enterprise. We will also teach you how to do projections and introduce you
to some financial statements and budgets.
588When you have studied this chapter; we hope that you will be able to test the
viability of your business idea.

4.5 THE VIABILITY OF A BUSINESS IDEA

In chapter 3 we explained the three stages to which an entrepreneur must pay
attention before he or she can start an enterprise, and we discussed the first stage,
the idea stage, in detail. We now move on to the second stage, the planning stage, in
the creation of an enterprise. The planning stage consists of two parts – the viability
study and the business plan. In chapter 4 we will discuss the first part of the planning
stage, namely the viability study.

To see where the viability study fits in, refer to the diagram in figure 3.1 and
4.1 below that illustrates the planning stage.

5
Before committing resources to a new enterprise, it is essential that the entrepreneur
establish whether the business idea is viable. This requires a viability study.

4.5.1 Why do we do a viability study?

Activity

Can you still remember the definition of a viability study?

Feedback

A viability study is an in-depth investigation of the market and profit potential of a business
idea.

It is extremely important to investigate the market and profit potential of the business
idea before we can continue with the second part of the planning stage, namely
drawing up the business plan. If an idea is not viable, we are going waste our time
and money by drawing up a business plan.

4.6 THE MARKET POTENTIAL OF A BUSINESS IDEA

To determine the market potential, the following four steps should be taken:
593Step 1: Do market research

594Step 2: Establish the needs and characteristics of consumers

595Step 3: Determine the mission and objectives of the enterprise

596Step 4: Do a market analysis to determine the total potential market, target

market and expected market share
4.6.1 Step 1: Do market research

Definition of the concept of market research

Market research entails gathering information on a certain market so that

better and more informed decisions can be made.

Market research will provide answers to the following questions:

 Is there a need for the products? (Need analysis)
 Who is going to buy the products? (Customer profile)
 How many products can be sold? (Market share)
 What price can be charged for the products? (Price analysis)

Market research will also provide answers to make the following assumptions:
 The number of products that must be sold to show a profit (Profit analysis)
 Whether the cash flow will be sufficient to run the business (Cash flow
analysis)

4.6.2 Step 2: Establish the needs and characteristics of consumers

It is essential that the entrepreneur do a proper needs analysis of the consumers and
their characteristics.
As an entrepreneur, you must find out the following:
 who your consumers are and what their needs are?
 what products or services the consumers want?
 how the consumers make their buying decisions?

The products or services that the consumers want may not necessarily be what you
want to offer. This implies that you require information on the characteristics, needs
and purchasing power of your customers.

Activity

What is a customer profile?

Feedback

A customer profile is a description of the potential customers. As an

entrepreneur, you need to determine the different characteristics of
consumers, and, after this has been done, you need to look for information
about their location and numbers.
The needs of the market (consumers) form the basis of the marketing strategy. After
you have analysed the needs of the consumers, it is important to determine how you
are going to meet those needs profitably.

You must work out how you can provide the right products or services at the right
prices and in so doing also make a profit. You must also determine how you are
going to distribute the products or services to the market and how you are going to
make the consumers aware of the products or services.
 What is a marketing strategy?

Feedback

The marketing strategy entails that you have to determine how you can provide
the right products or services at the right prices, how you are going to transfer
the products to the consumers (distribution) and how you are going to make
the consumers aware of the products (marketing communication).

The marketing strategy is based on the following four

elements:
 product
 price
 distribution
 marketing communication

We will discuss the marketing strategy in more detail in chapter 6.

How do we establish whether there is a need for a product or service?

It is important to take the four steps below in order to obtain the information you
require in deciding about the need for a product or service.

1. List the features of the product or service

This will help the entrepreneur to focus on those features that may be important to
the market, evaluate the offering to see if it really adds value to the market and use it
as a guide to test the needs of the market.

2. Determine who occupies the market (the major competitors), and who the
industry leaders, suppliers and other role players in the market are
Make a thorough analysis of your competitors to establish who they are, where they
are, how big their enterprises are, what products they offer and what prices they
charge.

3. Identify the possible consumers and segment the market

Determine the total market potential, do market segmentation, evaluate the
segments according to size, demand and profitability and decide on the target
market.

4. Use the information obtained and draw up a final list of the following:
The features of the product, the needs and profiles of the consumers and the
potential number of consumers.
 Study the above steps
Once you have information on the needs and characteristics of
your potential consumers, you can:
* determine what kind of enterprise you want to start
* define your business and determine your objectives

4.6.3 Step 3: Determine the mission and objectives of the enterprise

Activity

I
n chapter 2 we discussed the mission and objectives of an enterprise. Can
you still remember how we defined the mission and objectives?

Feedback

We defined the mission and objectives broadly as what you want to

achieve with the enterprise and how you want to achieve it.

You have already decided what type of enterprise you will be running. You must now
pay attention to the mission of the enterprise so that you know exactly what you
intend to do with your enterprise. You should spend enough time on determining the
mission and objectives of your enterprise.

Definition of the mission of the business

The mission is the broad goal of an enterprise. It defines the fundamental

and unique purpose of an enterprise and identifies its products or services
and consumers.

After the mission has been set, it is possible to formulate objectives for the
enterprise. An objective is something that the enterprise wants to achieve over a
specific time. Objectives must be set so that you have something to measure
progress against. Refer to chapter 2 for the discussion on primary and secondary
objectives.

Objectives should meet the following requirements:

 Objectives must be measurable.
 Objectives must be realistic and attainable.
 Objectives must be clear and understandable.
 Objectives must be set within a specific time frame.
4.6.4 Step 4: Do a market analysis

Activity

Can you name the three steps that must be taken to do a market analysis?

Feedback

We do a market analysis by taking the following three steps:

 Determine the total potential market.

 Determine the target market.
 Determine the expected market share.

4.6.4.1 Determine the total potential market

619a) Do market segmentation

Definition of market segmentation

The division of the total potential heterogeneous consumer

market into smaller homogeneous groups that have similarities
or characteristics in common.

This means that the total consumer market, which consists of consumers who are all
different (heterogeneous), is divided into groups of people who are all similar
(homogeneous).

How do we do market segmentation?

Total potential market

Geographic Demographic Psycho-graphic Behaviouristic

(Lifestyle) (Buying pattern)
 i. Geographic: Where are the consumers or where do they live (in which
area)?

ii. Demographic: Who are the consumers – what is their occupation and
average income? What is their average age/gender/social class/size of their
households?

iii. Psycho-graphic (Lifestyle): What products do they buy (prefer) or on what

products do they spend their money? What type of lifestyle do they maintain?

iv. Behaviouristic (Buying pattern): When do they buy the products? How
often do they buy?

It is important to remember that the types of questions that you will ask under each
segment will depend on the type of enterprise and the types of products that you
are going to offer.

627b) Examine each segment according to

 accessibility – will you be able to reach your consumers?
 measurability – can you determine the number of consumers in the
segment?
 profitability – can the consumer pay the price for your product that will
enable you to make a profit?

4.6.4.2 Determine the target market

Definition of a target market

The target market is the portion of the total market that you can reach with
your products or services.

This refers to a specific market segment or segments at which you will direct your
products or services or the people to whom you are going to sell your products or
services.

629a) How do we determine the target market?

 Total potential market

Target marktet

Competitors’ market share

1. First find out what part of the total potential market is served by your
competitors, by making a list of your competitors and determining which
market segment is their target market.

2. Then you deduct their market share from the total potential market.

630b) How do we examine the competitors?

Do a thorough analysis of your competitors by determining, for example,

who they are, where they are, what products they sell and what prices they
charge.

Now determine how well you can compete with them by compiling a SWOT
analysis. A SWOT analysis is a list of the strengths, weaknesses,
opportunities and threats of the entrepreneur. Remember, the strengths and
weaknesses come from the micro-environment and the opportunities
and threats from the market and macro-environments.

SWOT analysis

Strengths Weaknesses Opportunities Threats

633
Example of a SWOT analysis
Strengths Weaknesses
* good location * premises too small
* sufficient capital * lack of capital
* experienced labour * inexperienced staff
* experience in management * lack of management skills
* quality products * product quality below standard

Opportunities Threats
* no competition in the area * competition
* cheaper supplies of raw materials * unreliable suppliers
* technologically advanced machinery * outdated machinery
* enter new markets * increase in interest rates
* can include other products * crime in the area
* can expand enterprise * consumer boycotts
Please note: The above are only a few examples – your SWOT analysis will
depend on your particular situation.
636Remember: You cannot list the same example as both a strength and some
weaknesses – it can’t be both. For example, the amount of available capital may
be either a strength or a weakness. The same applies to opportunities and threats.
You must use different examples when you compile a SWOT analysis.
634

4.6.4.3 Determine the expected market share

Definition of the expected market share

The expected market share is that part of the target market that
an enterprise will be able to serve on the basis of its
production capacity and the state of the country’s economy.

This means that an entrepreneur cannot assume that he or she would be able to
serve the total potential target market, as the state of the country’s economy and the
capacity of his or her enterprise could restrict the size of the actual market share.

The size of the expected market share will be determined by

 the capacity of the enterprise
 the state of the economy
639
a) The capacity (production capacity) of the enterprise

Definition of the capacity of the enterprise

The capacity of the enterprise is the greatest possible workload that an

enterprise can handle within a certain period.

This means the maximum number of products that an enterprise can manufacture
or sell within a certain period. If the capacity of the enterprise is too small, it
restricts the number of products or services that can be provided and the ability of
the enterprise to satisfy the potential demand.

641b) The state of the economy

The state of the country’s economy

The state of the country’s economy determines the interest rate

and inflation rate, which directly influence the disposable
income or buying power of the consumers.

There may be a very big demand for the product or service, but if the economy of the
country is in a decline, consumers do not have the necessary money to buy the
product or service. If inflation increases, the buying power of the consumer
decreases and therefore they would rather spend money on necessities than on
luxuries. The type of product or service that the entrepreneur offers will determine
how the economy will influence his or her enterprise.
643Why do we calculate the expected market share?
Calculating the expected market share helps determine whether to go ahead with the
business idea. It indicates the number of consumers that will buy the products or
services; in other words, it indicates how many products or services (or units) the
enterprise can sell. We use this figure to calculate the sales figure or turnover in the
income statement (units sold multiplied by the price per unit), which is the starting
point of determining the profit potential of the business idea.

To make provision for restrictions and uncertain conditions, the

entrepreneur must calculate the expected market share for the
following three scenarios:
* a very prosperous scenario
* a most probable or likely scenario
* a very conservative or weak scenario

It is extremely important to calculate the market share as accurately as possible,

as it has a direct influence on the calculation of your income. To be realistic and to
reduce risk, the entrepreneur must calculate the market share for all three different
scenarios or circumstances. The entrepreneur must then calculate the profit for each
of these scenarios and judge from that whether it is worth going ahead with the
business idea.

The above process can be summarised and illustrated as follows:

 Calculate the expected market share for the three different scenarios.
 Calculate the profit for each scenario.
 Judge from this whether it is worth going ahead with the idea.

Calculate the Judge whether

Calculate the
expected market the business
profit for each
share for three idea is
scenario
scenarios worthwhile

We have now reached the second part of the viability study, where we are going to
determine the profit potential of the business idea. Remember that the viability study
consists of two main parts, namely determining the market potential and determining
the profit potential.
4.7 THE PROFIT POTENTIAL OF A BUSINESS IDEA
649
To determine the profit potential, the following two steps must be taken:
650Step 1: Calculate the expected income
651Step 2: Do projections

4.7.1 Step 1: Calculate the expected income

After calculating the expected market share and the number of units that can be sold,
it is time to calculate the expected income from the sales.

Activity

Can you list the two steps in calculating the expected income?

Feedback

We calculate the expected income by means of the following two steps:

(1) Calculate the total cost per unit.
(2) Calculate the selling price per unit.

653Calculating the expected income can be illustrated as follows:

Calculate the total Add a percentage
cost per unit profit to the cost price Income
(cost price ) (selling price )

4.7.1.1 Calculate the total cost per unit (cost price)

655a) Classify costs

Before we can calculate the total cost per unit, we must first look at the classification
of the different total costs.
We distinguish between the following types of total costs:
 fixed costs and variable costs
 direct costs and indirect costs

You must be able to explain the different cost concepts and to give
examples of each of them.
Important: We will NOT expect you to do any calculations.
65
Fixed costs
Definition: Costs that remain the same, regardless of the number of units
manufactured. Fixed costs are fixed in total but variable per unit.
660Examples: Rent or salaries

Variable costs
Definition: Costs that increase proportionally with the number of units manufactured.
Variable costs are variable in total but fixed per unit.
663Examples: Cost of raw materials or wages for overtime

Direct costs
Definition: Costs that can be allocated directly to the manufacturing of a product.
666Examples: Direct material costs or direct labour costs

Indirect costs
Definition: Costs that cannot be allocated directly to the manufacturing of a product.
Indirect costs are also known as overheads.
669Examples: Rent or indirect wages

670b) Calculate the total cost per unit

The way the cost of a product is calculated depends on the type of enterprise. There
are specific differences in calculating the cost per unit for the following types of
enterprise:
6721. manufacturing enterprises
6732. service enterprises
6743. commercial (trade) enterprises

Study the different formulae or methods to calculate the cost per unit for a
specific type of enterprise.
Important: We will NOT expect you to do any calculations.

675
6761. Calculating the total cost per unit for a manufacturing enterprise

677 Manufacturing costs + Commercial overheads = Total costs

Direct + + Indirect = Total costs

Direct labour
material costs costs per per unit
costs per unit
per unit unit

6Method
i. Calculate the direct costs of materials used to manufacture one unit.
ii. Calculate the direct costs of labour needed to manufacture one unit.
iii. Calculate the indirect costs per unit:
 682 Add manufacturing overheads, administrative overheads and
marketing overheads.
683 Divide the total overhead costs by the number of products
manufactured in the same period in which the costs were incurred.

iv. Add all the costs together (steps 1, 2 and 3) to get the total cost per
684

6852. Calculating the total cost per unit for a service enterprise

Total costs per ÷ Business hours = Cost per hour

month per month
686
Method
i. Calculate the total costs per month.
ii. Calculate the number of business hours per month.
689 Hours per day x Days per week x Weeks per year
690 ÷ Months per year
691 = Hours per month
692

iii. 6Calculate the cost per hour

693 Total costs per month ÷ Number of working hours (business hours) per month
694
6953. Calculating the total cost per unit for a commercial (trade) enterprise

Cost of sales + Overheads = Total costs

per unit per unit per unit
696
Method
697i. Calculate the cost of sales of one product.
698 Opening stock + Cost of purchased stock – Closing stock = Cost of sales
699 ÷ Number of items sold
700 = Cost of sales per unit

ii. Calculate the contribution of the overheads.

702 Add administrative and marketing overheads.
703 Divide the total by number of units sold.
704

iii. 7Add cost of sales per unit and overheads per unit.

4.7.1.2 Calculate the selling price

There are two very important factors that have to be considered when
determining the selling price of a product or service:
* The selling price should at least cover all the costs incurred.
* The selling price is directly influenced by the competitors’ prices.

705a) The selling price should at least cover the costs incurred
If the costs are not covered by the selling price, the enterprise will show a loss from
the start and will not survive. The selling price must make a contribution towards
profit. Remember, the main reason (primary objective) for starting an enterprise is to
make a profit. The profit is the return on the investment that the entrepreneur has
made in his or her enterprise.

707b) The selling price is directly influenced by the competitors’ prices

Your price must be more or less the same as the competitors’ prices, unless you
offer more benefits. If your business has exceptional strengths, this can justify high
prices. However, if your business has many weaknesses, you will be obliged to
charge lower prices than your competitors.

709How do we calculate the selling price?

Total costs per + Percentage =

unit (cost profit (% Selling price
price) mark-up)

Having established the selling price, we can now calculate the potential income
and net profit from the sales of our products or services.

4.7.2 Step 2: Do projections

The final part of our viability study is based on the following financial projections:
7121. Calculate the expected net profit (pro forma income statement).
7132. Calculate the break-even point.
7143. Do cash planning, by preparing the cash budget (cash forecast).
 Study these financial projections carefully. You must be able to define
them, know how they are compiled (the formulae) and explain the main
entries. Important: We will NOT expect you to do any calculations or to
draw up financial statements.

4.7.2.1 Calculate the expected net profit

715How do we calculate the expected net profit?

716We calculate the expected net profit by drawing up a pro forma income
statement.

Definition of an income statement

An income statement is a summary of the income and expenditure of an

enterprise over a specific period.

To be viable, the business idea must be profitable. To determine whether the idea
would be profitable, we have to multiply the expected number of units that would be
sold (which we determined in the market analysis) by the selling price (which we
determined in the first part of our profit analysis) to get our sales figure (turnover).
From the turnover, we then have to deduct the cost of sales to get the amount of
gross profit. Then we have to deduct all the expenses from the gross profit to get the
expected net profit.

718
719The main entries on an income statement are as follows:
720Sales (units sold multiplied by the selling price)
721– Cost of sales
722= Gross profit/income
723– Expenses
724= Net profit/income

Refer to chapter 5 of the study guide for the explanations of the main entries
and examples of income statements.
 Activity

Are an income statement and a pro forma income statement the same?

Feedback

estimated
No, they are not the same. Pro forma means that the income statement is based on
figures. An income statement is based on real figures. Because we have
not yet started the enterprise, we do not have real financial figures yet and
therefore have to work on estimated figures.

726What is the purpose of drawing up a pro forma income statement?

727The purpose of drawing up a pro forma income statement is to calculate the net
profit for the three scenarios we have used to determine our expected market share.

Activity

Can you still remember these three scenarios?

To make an informed decision about our expected net profit, we are going to draw up
a pro forma income statement for a very prosperous scenario, a most probable
scenario and a very weak scenario.

4.7.2.2 Calculate the break-even point

During the first part of the profit analysis we emphasised the role that cost plays in
determining the selling price of a product or service. We are now going to determine
how many products the entrepreneur has to sell in order to cover all the costs.
730
Definition of a break-even point

A break-even point is the number of units that must be sold

for the income and expenditure to be equal. In other words,
this is the point where all the costs and expenditures are covered. At this
point the net profit will be equal to R0, which means neither a profit nor a
loss is shown.

731
How do we calculate the break even point?
The break-even point can be calculated in rand value or in units.

Example 1: Calculate the break-even point in units

734
Formula
735 Fixed costs
736Units =
737 Price per unit – Variable cost per unit
738
Example 2: Calculate the break-even point in rand value

Formula
740 Fixed costs
741Pula = x 100
742 Gross profit margin %

Refer to chapter 5 of the study guide for an example of the calculation of the
breakeven point in units.

Ways to lower the break-even point

The lower the break-even point, the sooner the enterprise can start making a profit.
Therefore, the entrepreneur should recalculate the break-even point regularly.

The break-even point can be lowered by

 lowering direct costs
 exercising cost control on fixed expenses
 increasing prices

Study the ways to lower the break-even point.

Benefits of calculating the break-even point

By knowing the break-even figure, the entrepreneur can manage the business more
effectively. The entrepreneur can allocate sales and marketing efforts (such as
advertising) to sell more products in order to reach the break-even point sooner.

 Cost can be controlled if a ‘slow’ month is predicted.

 Profits can be maximised by knowing and understanding the break-even figure.
4.7.2.3 Do cash planning: the cash budget

Activity

Why is it so important for an enterprise to have enough cash available?

Feedback

Making a profit is not enough, as profits are necessary over the long run. Enough cash
should
be available to manage the business on a daily basis. In other words, the
enterprise must be able to meet expenses as they occur.

Definition of a cash budget

A cash budget is a formal plan for forecasting future receipts and
payments of cash. It is designed to cover a period of one year
and is divided into twelve monthly or four quarterly periods.

The purpose of a cash budget

 It shows how cash flows in and out of the enterprise.
 It may be used to plan short-term credit needs.
 It determines future ability to pay debts and expenses because it helps the
entrepreneur to predict months when there may be a cash shortfall.
 Financial institutions require proper cash budgets before making capital
expenditures for new assets and expansion. Financial institutions would be
more inclined to grant loans because it shows that the entrepreneur exercises
proper financial planning.
 A business that operates on a cash basis will stand a better chance of getting
loans in difficult times.
 It highlights problem areas in payment schedules which can then be used to
spread payments evenly throughout the entire year.

The main entries on a cash budget are as follows:

752Total cash receipts
753 – Total cash payments
754 = Net cash balance
755 + Opening cash balance
756 = Closing cash balance
Refer to chapter 5 of the study guide for the explanations of the main entries
and an example of a cash budget.

4.8 WHEN IS AN IDEA VIABLE?

To be viable, the enterprise must be able to:
 generate sustainable profits over the long term
 generate enough cash (money) to meet its daily expenses

If these requirements cannot be met, the entrepreneur cannot start the enterprise.
The entrepreneur then has to start over by looking for a new idea, testing the
feasibility of the new idea and going through the entire process of the viability study
again.

If the entrepreneur decides that the idea is viable, the next step in the planning stage
will be to draw up a business plan.

You have now reached the end of chapter 4.

4.9 SUMMARY
In this chapter you have learnt that, before you can turn a business idea into an
enterprise, you must do a viability study. In the first part of the viability study you
must determine the market potential of the idea. To do this, you must establish the
needs in the market, do market research, set the mission and objectives of the
enterprise and decide on the types of products and consumers you want to focus on.
Then you have to do market segmentation, choose your target market and determine
the expected market share to establish how many products you can sell.

In the second part of the viability study, you must determine the profit potential of the
idea. You must calculate your cost price, decide on the profit percentage and
determine your selling price in order to calculate your income and net profit. You
must calculate the break-even point and make estimations by using tools such as the
pro forma income statement and the cash budget.

Finally, you must decide whether your business idea is viable. In other words, you
must decide whether the enterprise can generate sustainable profits over the long
term, as well as enough cash to meet the daily expenses.

If the market and profit potential do not yield satisfactory results, it is not worthwhile
going ahead with the idea, and then you will have to look for a new idea, test the
feasibility of the idea and go through all the steps in the viability study again. If the
market potential and profit potential show that your business idea is viable, you can
move on to the second part of the planning stage, which entails drawing up a
business plan. We will discuss the business plan in chapter 5.
 .

4 4.10 SELF-ASSESSMENT

To test and assess your knowledge of this chapter, Complete the self-assessment
questions on chapter 4 below. Remember: The only way you can test your knowledge
is by answering the questions.

Read the case study below and answer all the questions that follow.

Case study: The Feather Dusters

While working as an administrative manager for a big insurance company and raising
two toddlers, Wendy Williams always wished that she could find a team of reliable
people to clean her house thoroughly in just a few hours. She talked to her
neighbours and acquaintances in Boston, a suburb in Bellville, and realised that
most of them worked full time and that they all experienced a common problem,
namely the lack of reliable, trained domestic workers. She established that people
had to employ and train new domestic workers on a regular basis, many houses in
the suburb did not have staff quarters, legislation regulating the employment of
domestic workers had persuaded many people to rather not employ full-time
domestic workers and there were no cleaning services in the immediate area of
Madiba. She resigned from her job and started her own enterprise, The Feather
Dusters.

Wendy started on a small scale, since she did not have much capital. She used her
pension payout and savings to convert her garage into an office and had to take out
a loan of R30 000 to purchase two vacuum cleaners and office equipment. She also
applied for a bank overdraft to purchase cleaning detergents, feather dusters and
brooms. Wendy employed six employees – two to do the dusting and sweeping, two
to vacuum the carpets and two to clean the bathrooms, kitchens and tiles. She used
her own vehicle, a Volkswagen Kombi, to transport the employees and equipment
from one workplace to another.

Initially Wendy started by only cleaning the homes of her friends. She only offered
two services – a basic cleaning service that included dusting, vacuuming and
cleaning bathrooms and floors, and a more comprehensive service that also included
cleaning kitchen appliances such as stoves and ovens, polishing furniture and
washing windows. Her prices were determined according to the type and amount of
work, as well as the size of the house.

As more and more people became aware of her enterprise, the orders started
streaming in and she could not accept all of them. Wendy had to employ more
people, put together different teams and appoint a supervisor for each team. She
had to buy equipment for each team, as well as vehicles to transport the teams. Her
premises became far too small to store the stock and to accommodate so many
employees and vehicles.
Wendy realised that she could no longer handle the enterprise on her own. She
decided to involve four of her friends in the enterprise to accumulate more capital
and to help her with the management, and they registered the new enterprise as a
partnership. The enterprise was divided into formal departments, with an
experienced person in charge of every function. Although Wendy and her partners
invested R100 000 of their own capital in the business, they still had to apply for
financing to purchase new cleaning equipment, office equipment and vehicles. They
rented a building in an office park in Bellville with enough space for a reception area,
offices for each of the departments, a storeroom, a training centre for new
employees, a room where the employees could relax between their shifts and safe
parking for the vehicles.

Wendy and the other owners decided to include washing and ironing curtains and
linen, as well as steam cleaning carpets and lounge suites in their range of services.
They also realised that they had to advertise their services to retain and increase
their market share and decided to launch a marketing campaign to make potential
clients in the surrounding suburbs aware of their cleaning services.

MULTIPLE-CHOICE QUESTIONS
7741. Before Wendy could determine her expected market share, she had to …
775 a) calculate the total cost per unit of the cleaning services.
776 b) calculate the selling price of the cleaning services.
777 c) determine the total potential market for cleaning services. 778
778 d) determine her target market.
779 Choose the correct option:
780 1) a, b
781 2) b, c
782 3) c, d
783 4) b, d
784

7842. The people in Boston indicated that they would rather use cleaning
services than employing domestic workers. This relates to the … segment
of the total potential market for cleaning services.
785 1) geographic
786 2) demographic
787 3) psychographic
788 4) behaviouristic
789

7893. Most people would most probably use the basic cleaning services on a
weekly basis. This relates to the … segment of The Feather Dusters’ total
potential market.
790 1) geographic
791 2) demographic
792 3) psychographic
793 4) behaviouristic
7944. Most of the women in Boston work full time and do not have enough time
to clean their houses themselves. This relates to the … segment of the total
potential market for cleaning services.
795 1) geographic
796 2) demographic
797 3) psychographic 798
798 4) behaviouristic
799

7995. Power cuts could prevent The Feather Dusters from keeping to their daily
schedules. They could list this example as … in their SWOT analysis.
800 1) a strength
801 2) a weakness
802 3) an opportunity
803 4) a threat
804

8046. Legislation regulating the employment of domestic workers had persuaded

many people to rather not employ full-time domestic workers. This could be
regarded as … for The Feather Dusters.
805 1) a strength
806 2) a weakness
807 3) an opportunity
808 4) a threat
809

8097. As more and more people became aware of her enterprise, the orders started
streaming in and Wendy could not accept all of them. This is an example of
how the … could restrict the ability of The Feather Dusters to satisfy the
potential demand for cleaning services.
810 1) capacity of the enterprise
811 2) economy of the country
812 3) buying power of the target market
813 4) size of the market
814

8148. The amount that The Feather Dusters have to spend on fuel to transport
the cleaning ladies from one workplace to another could be regarded as …
costs.
815 1) fixed
816 2) variable
817 3) overhead
818 4) indirect
819

8199. To calculate the total costs per unit of providing cleaning services, The
Feather Dusters would divide the total costs per month by the …
820 1) direct labour costs.
821 2) cost of renting the premises.
822 3) hours worked per month. 823
823 4) overheads per month.
82410. To calculate the break-even point in units, The Feather Dusters would
deduct the … cost per unit from the price per unit and divide the fixed costs by
this figure.
825 1) direct material
826 2) indirect
827 3) direct labour
828 4) variable

4.11 SUGGESTED SOLUTIONS TO THE SELF- ASSESSMENT QUESTIONS

IN 4.10
829

1. 3
830The market analysis consists of three steps. The first step entails determining
and analysing the total potential market, the second step entails determining the
target market and the third step entails determining the expected market share.
Options a) and b) form part of determining the profit potential of the idea. Therefore,
only option 3 can be correct.

2. 3
832The psychographic segment represents the lifestyle of the consumers, which
determines the types of cleaning services they would prefer. Option 1 relates to
where the consumers live, option 2 relates to who the consumers are and option 4
relates to when and how often the consumers would use the cleaning services.
833
3. 4
834The behaviouristic segment represents the buying pattern of the consumers,
which determines when and how often the consumers would use the cleaning
services. Option 1 relates to where the consumers live, option 2 relates to who the
consumers are and option 3 relates to which types of services the consumers prefer.
835
4. 3
837The psychographic segment represents the lifestyle of the consumers, which
includes whether or not they work full time. Option 1 relates to where the consumers
live, option 2 relates to who the consumers are and option 4 relates to when and how
often the consumers would use the cleaning services.
838
5. 4
839Opportunities and threats come from the market and macro-environments. Power
cuts can be classified as an example of the physical environment (a variable in the
macroenvironment). Option 3 is incorrect, as power cuts could delay the execution of
the cleaning services and can therefore be regarded as a threat. Options 1 and 2 are
also incorrect, because strengths and weaknesses come from the micro-
environment.
840

6. 3
841Opportunities and threats come from the market and macro-environments. The
legislation on the employment of domestic workers can be classified under the
political environment (a variable in the macro-environment). Option 4 is incorrect,
because the legislation persuaded people to rather use cleaning services, which
could definitely not be regarded as a threat for The Feather Dusters. Options 1 and 2
are also incorrect, because strengths and weaknesses come from the micro-
environment.
842
7. 1
843The capacity of an enterprise refers to the maximum number of products an
enterprise can manufacture, or the maximum number of services an enterprise can
provide, within a certain period. Wendy only had six employees and one vehicle;
therefore The Feather Dusters’ capacity restricted the number of services they could
provide per day. Option 2 refers to the influence that the economic situation has on
the disposable income of the consumers. Option 3 refers to the consumers’ ability to
pay for the cleaning services. Option 4 refers to the number of consumers that would
use the cleaning services.
844
8. 2
845Variable costs would increase proportionally with the number of services
provided – the more houses they have to clean, the more they have to travel from
one destination to another. Option 1 refers to costs that remain the same, regardless
of the number of services provided, such as the rent of the new premises. Options 3
and 4 are the same – costs that cannot be allocated directly to the manufacturing of
a product.
846
9. 3
847The Feather Dusters provide cleaning services and can therefore be classified as
a service enterprise. To calculate the total cost per unit, they have to divide the total
costs per month by the hours worked per month. The total costs per month would
include the salaries of the cleaning ladies, the rent of the premises and the
overheads per month. 48
849
10. 4
850The formula for calculating the break-even point in units states that fixed costs
should be divided by (price per unit minus variable costs per unit). Therefore, only
option 4 can be correct.