Test your business idea

Many businesses fail because they built something nobody wanted to pay for. A test finds that out while a mistake is still cheap. It works best when you decide in advance what result would make you go ahead.

Define who you are selling to and what success looks like

Describe your customer in specific terms: who they are, where they are, what problem they have, what they do about it now and what they already pay for that. "Everyone" is not a customer.

Then set a pass mark before you start, such as the number of people who pay and the price they pay. If you set it afterwards, you will read any result as a success.

Research what already exists

Start with published information, because it costs nothing and tells you what to ask later.

Look at who already solves the problem, directly or in a different way, what they charge and what their customers complain about. If established businesses tried your idea and failed, find out why before you continue.

Talk to the people you plan to sell to

Speak to people who match your customer description, and not to friends and family, who will tell you what you want to hear. Ask about the problem and what they do about it now before you describe your solution, and ask what it costs them in money or time. A survey can confirm a pattern you have already seen in conversations, but it cannot find the pattern for you.

Compliments are not evidence. "That is a great idea" costs the person nothing. Ask for a commitment instead, such as a deposit, a pre-order or a signed letter of intent.

Sell a small version for real money

Sell a small version to a group before you invest in stock, premises or software. Measure what customers do, such as whether they pay, come back and refer others, rather than what they say they will do.

Real sales are trading, so tax and consumer law apply from the first one. Trading income up to the trading allowance is tax-free, and you may not need to tell HMRC about it.

If you take orders from consumers online or by phone, they have a right to cancel within 14 days, and you must tell them so, or the period extends.

Work out your break-even point

Add up your fixed costs for a month, such as rent, software and insurance. Take the variable cost of each sale, such as materials or delivery, away from your price. Divide the fixed costs by what is left to find how many sales you need each month to cover your costs.

With fixed costs of £2,000 a month, a price of £25 and variable costs of £10, each sale leaves £15, so you need 134 sales a month to break even. Check whether your research suggests you can reach that number. If it does not, change the price, the costs or the idea.

Decide what to do next

Compare the result with the pass mark you set. If you passed, write the plan and the cash flow forecast with real figures from the test. If you narrowly missed, change one thing, such as the customer, the price or the offer, and test again. If you missed by a wide margin, stopping early saves you the money you would have spent finding the same thing out later.