FEASIBILITY STUDY
BY DR. LEONARDO DELIZO, PhD., MSBA, SLH – JHS
CEO & PRESIDENT
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Feasibility studies aim to objectively and rationally uncover the strengths and weaknesses of the existing business or proposed venture, opportunities and threats as presented by the environment, the resources required to carry through, and ultimately the prospects for success. In its simplest term, the two criteria to judge feasibility are cost required and value to be attained. As such, a well-designed feasibility study should provide a historical background of the business or project, description of the product or service, accounting statements, details of the operations and management, marketing research and policies, financial data, legal requirements and tax obligations. Generally, feasibility studies precede technical development and project implementation.
Five common factors (TELOS)
Technology and system feasibility
The assessment is based on an outline design of system requirements in terms of Input, Processes, Output, Fields, Programs, and Procedures. This can be quantified in terms of volumes of data, trends, frequency of updating, etc. in order to estimate whether the new system will perform adequately or not. Technological feasibility is carried out to determine whether the company has the capability, in terms of software, hardware, personnel and expertise, to handle the completion of the project when writing a feasibility report, the following should be taken to consideration:
- A brief description of the business
- The part of the business being examined
- The human and economic factor
- The possible solutions to the problems
At this level, the concern is whether the proposal is both technically and legally feasible (assuming moderate cost).
Economic feasibility
Economic analysis is the most frequently used method for evaluating the effectiveness of a new system. More commonly known as cost/benefit analysis, the procedure is to determine the benefits and savings that are expected from a candidate system and compare them with costs. If benefits outweigh costs, then the decision is made to design and implement the system. An entrepreneur must accurately weigh the cost versus benefits before taking an action.
Cost-based study: It is important to identify cost and benefit factors, which can be categorized as follows: 1. Development costs; and 2. Operating costs. This is an analysis of the costs to be incurred in the system and the benefits derivable out of the system.
Time-based study: This is an analysis of the time required to achieve a return on investments. The future value of a project is also a factor.
Legal feasibility
Determines whether the proposed system conflicts with legal requirements, e.g. a data processing system must comply with the local Data Protection Acts.
Operational feasibility
Operational feasibility is a measure of how well a proposed system solves the problems, and takes advantage of the opportunities identified during scope definition and how it satisfies the requirements identified in the requirements analysis phase of system development.
Schedule feasibility
A project will fail if it takes too long to be completed before it is useful. Typically this means estimating how long the system will take to develop, and if it can be completed in a given time period using some methods like payback period. Schedule feasibility is a measure of how reasonable the project timetable is. Given our technical expertise, are the project deadlines reasonable? Some projects are initiated with specific deadlines. You need to determine whether the deadlines are mandatory or desirable.
Other feasibility factors
Market and real estate feasibility
Market Feasibility Study typically involves testing geographic locations for a real estate development project, and usually involves parcels of real estate land. Developers often conduct market studies to determine the best location within a jurisdiction, and to test alternative land uses for given parcels. Jurisdictions often require developers to complete feasibility studies before they will approve a permit application for retail, commercial, industrial, manufacturing, housing, office or mixed-use project. Market Feasibility takes into account the importance of the business in the selected area.
Resource feasibility
This involves questions such as how much time is available to build the new system, when it can be built, whether it interferes with normal business operations, type and amount of resources required, dependencies,
Cultural feasibility
In this stage, the project's alternatives are evaluated for their impact on the local and general culture. For example, environmental factors need to be considered and these factors are to be well known. Further an enterprise's own culture can clash with the results of the project.
Financial feasibility
In case of a new project,financial viability can be judged on the following parameters:
- Total estimated cost of the project
- Financing of the project in terms of its capital structure, debt equity ratio and promoter's share of total cost
- Existing investment by the promoter in any other business
- Projected cash flow and profitability
Output
The feasibility study outputs the feasibility study report, a report detailing the evaluation criteria, the study findings, and the recommendations.
Writing a Business Plan
When you’re done with your business feasibility study and you find that your business idea is feasible, the next step is to write your business plan. Writing a business plan is important, as it will be your guideline in running your business. Your business plan should explain exactly how you will run your business, with all the exact figures including the capital needed to start the business. You should also provide the calculation of payback period in your business plan. You can use all the calculation that you put in your business plan to do a review on your business in the future. You can compare the figures in your business plan to the figures that you currently have to see whether your business is running better or at least just as planned, or not.
If you don’t have enough capital to start your business and you plan to attract some investors, you need to put some extra efforts in writing your business plan. Investors are investing their money to get profit, so they would need to see an excellent business plan before they decide to invest in a business. Your business plan should explain how your business can generate profit, how long will the investors get their return of investment, and how much profit they will get. In short, you should try to see from the investors’ point of view when you write the business plan.
To attract investors, you need to provide complete information about the management, customers, description of products or services, marketing plan, and how your business would deal with competition. Most investors want to get the largest amount of profit by investing in the safest business. When you present your business plan, investors will likely to ask you lots of questions about your business. It is better for you to prepare yourself by identifying the questions that the investors may ask before you present your business plan to them. The questions that the investors’ ask usually related to the risks of the business and how you will deal with them.
This article is based on my personal experience in running some small businesses, so it is quite simple. Medium to large businesses definitely need a more sophisticated business plan.
Feasibility Report
Feasibility Report is studying a situation and a plan to do something about it, and then determines whether the plan is "feasible" and whether it is practical.
Feasibility Report answers the question of whether a plan should be implemented by stating "yes", "no", and sometimes "maybe". Not only recommendation, Feasibility Report should also provide the data and the reasoning behind that recommendation
Feasibility Evaluation
Feasibility evaluations provide results of interest to researchers and sponsors of the research. The typical characteristics that a feasibility evaluation tests for are functionality attributes and the possibility of extending to more general phenomena (changeability).
Feasibility Analysis for Small Business
Most people want to have their own small business. Unfortunately, we can see that many of them are failing. The failures of small businesses are caused by many different things. One of the things that can cause a small business to fail is the lack of feasibility analysis.
Before starting their own small business, people need to perform a simple feasibility analysis. The main objective of the analysis is to see whether the business idea is worth pursuing.
The following are several things that people should do when doing their feasibility analysis:
Feasibility Analysis
Feasibility Analysis a very important tool to help us assess the viability of starting a new business, re-organizing or expanding our present business.
Feasibility Analysis provides important information that we need to make the critical decision of whether to go forward with a business step.
The Feasibility Analysis usually in a form of a formal study conducted by someone outside the business (for example. consultant). However, it is important that the business founders are involved in the study.
Feasibility Analysis provides important information that we need to make the critical decision of whether to go forward with a business step.
The Feasibility Analysis usually in a form of a formal study conducted by someone outside the business (for example. consultant). However, it is important that the business founders are involved in the study.
Bankable Feasibility Study
Bankable Feasibility Study is a comprehensive analysis of a project's economics and is used by the banking industry for financing purposes.
Framework Of Feasibility Study
a. General Model
0. General description of the business
1. Legal aspects (to be in line with the law and regulation)
2. Social aspects (to be in line with the social environment)
3. Management aspects (capability of the owner and top managers and general methods of managing the business project)
4. Technical aspects (timing, location, capacity, tools, production methods, technology, input, employees, etc.)
5. Market aspects (market structure, competitors, market target, market share, advertisement, projected sales)
6. Financial aspects (funding, fund allocation, projected balance sheet + income statement + cash flow, Net Present Value, IRR, BCR, etc)
7 General Conclusion
b. Arkansas Small-Business Model
Step 1. Identify your personal objectives
Step 2. Identify your personal skills and experience
Step 3. Indentify your personal financial resources
Step 4. Describe your product or service
Step 5. Describe your customer
Step 6. Describe your competition
Step 7. Describe your sales and distribution process
Step 8. Describe your management requirements
Step 9. Develop your sales forecast
Step 10. Identify your start-up expenses
Step 11. Estimate your 12-month operating budget
Step 12. Evaluate Business Feasibility
c. Alan Thompson Model
1. Executive summary
2. Product of service
3. Technology
4. Market environment
5. Competition
6. Industry
7. Business model
8. Marketing and sales strategy
9. Production requirements
10. Management and personnel
11. Intellectual property
12. Regulation / environmental issues
13. Critical risk factors
14. Timing considerations
15. Financial projections
16. Capital requirements and strategy
17. Final recommendation
Steps of Business Feasibility Study
Steps of Business Feasibility Study
Planning
A. Determining
- general questions to answer
- specific questions to answer
B. Constructing a framework to answer those questions
C. Determining the data needed
D. Determining the steps and followed by implementing the Business Feasibility Study
Planning
A. Determining
- general questions to answer
- specific questions to answer
B. Constructing a framework to answer those questions
C. Determining the data needed
D. Determining the steps and followed by implementing the Business Feasibility Study
Feasibility Assessment
- A quick overview of the main points of the assessment to give picture of the proposal along with the recommendations
- Background information of the business proposition
- Description of the business idea
- Advantages and disadvantages of the business idea
- The potential market for the product
- Financial analysis
- Risk analysis
- Comparative analysis of alternatives
- Recommendation of preferred alternative, decision to proceed or not to proceed
Technical Feasibility
Technical Feasibility is the process of proving that the concept is technically possible.
The objective of Technical Feasibility step is to confirm that the product will perform and to make sure that there are no production barriers.
The objective of Technical Feasibility step is to confirm that the product will perform and to make sure that there are no production barriers.
IT Feasibility Study
Information Technology (IT) Feasibility Study is an analysis to determine whether a business need can be fulfilled by using a technical solution. The result of IT Feasibility Study determines whether a solution should be implemented.
Definitions of Business Feasibility Study
Activities / efforts / analysis to measure the cost and benefit of a business project in order to define the efficiency and effectiveness of the project's method and tools (according to economic theory)
Other definitions of Business Feasibility Study:
- Activities / efforts / analysis to determine if a business opportunity is possible, practical, and viable (according to Heath Hoagland and Lionel Williamson, 2000)
- Activities / efforts / analysis to examine critical opportunities and obstacles that might make or break the proposed business (according to South Dakota Small Business Development Center)
Other definitions of Business Feasibility Study:
- Activities / efforts / analysis to determine if a business opportunity is possible, practical, and viable (according to Heath Hoagland and Lionel Williamson, 2000)
- Activities / efforts / analysis to examine critical opportunities and obstacles that might make or break the proposed business (according to South Dakota Small Business Development Center)
Business Feasibility Study Coverage Choices
- Externalities
- Certain Aspects
- All Aspects
- Internalities
Business Feasibility Study Terms
Project Period / Duration
= as long as the project operates
= its economic period = as long as it can operate efficiently (can minimize cost)
= if the period is very long (more than 50 years) --> assumed to be only 50 years or even shorter, since it's df will be very small
Opportunity Cost
The net benefit created if resources are used in the other possible and best economic activity, since they have already been used in certain chosen project.
= as long as the project operates
= its economic period = as long as it can operate efficiently (can minimize cost)
= if the period is very long (more than 50 years) --> assumed to be only 50 years or even shorter, since it's df will be very small
Opportunity Cost
The net benefit created if resources are used in the other possible and best economic activity, since they have already been used in certain chosen project.
Business Feasibility Checklist
- Identify the Core Competency of your business
A core competency might be:
- Valuable (can generate large revenue)
- Rare (not easily found in competitors)
- Non Substitutable (cannot be replaced)
- Costly to imitate (expensive for the competitors to try to duplicate)
- Develop a Concept Test
- Conduct a Market and Industry Research
- Conduct an Organizational Feasibility Analysis
Determine whether the proposed business has sufficient management expertise, organizational competence, and available resources.
- Conduct a Financial Feasibility Analysis
Financial Feasibility Study elements:
- Estimation of Sales
- Estimation of Costs
- Estimation of Break-even Point and Profitability
- Identify the Strength, Weaknesses, Opportunity and Threats (SWOT Analysis) of the business
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