In short
Write down the assumptions the investment rests on and test the riskiest ones while the money is still in the bank. Talk to future clients, check the price, estimate when revenue arrives and how much cash you need until then. Sometimes the right result is a decision not to invest in this form.
What this does not cover. Whether your market will say yes. Only conversations with real clients and one real tender will show that.
The assumptions an investment rests on
An example: a general contractor builds housing and is thinking of moving into a segment new to the company, warehouses for logistics companies. The questions below are about that step, but they work the same way for any new direction.
| Assumption | The question | How to test it |
|---|---|---|
| Demand | Who exactly will commission such buildings, and how many tenders a year will you actually see? | Conversations with clients who build warehouses, not with acquaintances who simply like the idea |
| Price | What will they pay you compared with contractors who already build such projects? | Find out who won similar tenders and at what price, and price one real tender |
| Cost to deliver | What does such a project cost, including subcontractors, plant and your people’s time? | Count it on the estimate for one real project, not on a market average |
| Time to revenue | When does revenue cover the investment? | A month by month model: tender, contract, first certificate, payment after it, retention until handover. Compared with how long you are ready to wait |
| Who will run it | Which site manager runs the first project, and which site do you take them off? | Name the person and the site that will get less attention because of it |
| Cash until break-even | How much money is needed before the direction pays for itself? | Runway to the milestone |
Test the riskiest first
Sort the assumptions by two things: how much the decision depends on it, and how little you actually know about it. Start with the one at the top of both lists. More often than not it is demand or the time to revenue.
What to check in your company
- Write the investment decision in one sentence: what, how much, by when.
- List the assumptions it rests on and mark the ones checked with facts rather than opinions.
- Have you talked to clients who build such projects? And asked who they work with now?
- Do you know how many months you are ready to wait for the first payment?
- Who will lead the direction, and what will stop on the other sites because of it?
- What result would make you stop, for example three lost tenders in a row? Name it before you start.
DecideWrite the decision down, with the result that would make you stop