There are few things more exciting than the light bulb moment a business idea crystalises in your mind.
You may be mulling over a problem or engaged in a hobby when it strikes — obvious, yet brilliant.
Once the initial excitement subsides, you need to assess whether your idea has legs. For some, the first step is deciding whether their money-making activity is actually a hobby or a business. The major difference, of course, is you are not required to pay tax on money earned from a hobby.
Interestingly, turnover is not a factor in determining whether something is a business or hobby. The Tax Office, instead, looks at intent: was it your intention to make a profit.
To that end, the ATO will look at whether you have registered a business name, set up separate bank accounts, aim to make a profit, keep account records, or operate from a business premises.
If you are unsure whether you are engaged in a hobby or business, seek professional advice. You can even apply for a binding private ruling from the ATO. Some hobbies may spawn business ideas, if you find surprising demand for something you do on an ad-hoc basis.
But for other budding entrepreneurs, the following questions will help you work out if your idea is a goer.
Does it solve a problem?
Most successful business ideas solve a problem by either finding a gap in the market (Virgin — low cost airlines), or finding a more efficient, cheaper or easier way to do something (Google/AirBnB/Uber).
What is your market?
This is the number one question potential investors will ask. You can gauge potential success from how broad your target market is, and how motivated they will be to use your business. For example, introduction agencies have both a wide and motivated market. But it is also a crowded space, which is where the next point comes into play.
Is there a unique selling point?
If you do not offer a unique product or service, you must have a unique selling point. There is no point replicating an existing business unless you do something better. Unique selling points can be things such as price, service, speed or accessibility.
Will people pay for it?
People may like your idea, but will they pay for it? And how much? You also need to have a realistic idea of how many people will buy your product/service.
Can you test it?
If your business idea began as a hobby (perhaps selling something online or through informal networks), you may already have an idea of viability. Innocent Drinks tested its product at music festivals, asking customers to answer the question “Should we give up our jobs to make these?” by throwing empty bottles in bins marked ‘Yes’ or ‘No’ 13.
Does it pass the ‘4am test’?
Reddit co-founder Alexis Ohanian says (in 2016) a business idea has wings if he can imagine thinking about it at 4am. “It really has to pass that 4am test because this will be your life from now on. So make sure (it’s) the right one — the right problem, the right industry.”
Can you do it tough?
Are you at a stage in life when you can make the financial and personal sacrifices needed to get a new business off the ground? Work out the minimum income you need to survive and whether your business can generate that.
