What is a feasibility study?
A feasibility study analysis the viability of a business idea by using a disciplined, and documented process, which looks at the idea from its logical beginning to its logical end.
This is why a feasibility study should be carried out in order to assess the viability of a new business idea. It is the primary and most important thing in developing a business idea.
This is why you should appreciate the importance of a feasibility study. As far as I’m concerned, a feasibility study is what every business idea needs so that it has the best chance possible to be successfully executed. This is one of the pieces of advice I give to most African entrepreneurs.
Conducting a feasibility study is one of the key activities within the project initiation phase.
A smart businessman knows the importance and purpose of a feasibility study, as well as what its implications are. If you have never done this before, then chances are you may not be clear as to what is a feasibility study and why is it important.
By definition, a feasibility study is used to identify and detail the potential issues with a business idea. This study is used to find the points that would ‘make or break’ the idea. In even simpler terms, it finds out whether a business idea makes any sense or not. It focuses on three major areas, which are:
- Market related issues
- Technical/organisational issues
- Financial issues
Reasons for doing a feasibility study
The biggest reason for doing a feasibility study is to determine whether it is worth going ahead with the project/business venture or not. It also helps you to identify the key issues that may arise during the implementation of the project and what are the best ways to tackle them, along with alternatives that can avoid their occurrence altogether.
How to Do a feasibility study
Broadly speaking the following sections form the feasibility study report:
The executive summary is a description of the problem or opportunity that is focused on in the study. The report’s purpose and the importance of the research with regard to the target audience. The executive summary also covers the constraints in which the study was conducted. The length of this portion should be within 6 pages so that a senior executive can quickly understand it.
The background section provides a detailed and thorough description of the feasibility study, including what it was carried out for and whether there were any similar implementations anywhere else.
Outline of project
This part briefly covers the entire product. It also includes the services or the products that are to be manufactured, outlining the entire business model (i.e., how it will make money.). The project outline should also cover the processes involved, along with the size, type and location of inputs. It specifies the time from which the project is initiated, until it is completely set up and operating at full capacity.
Methodology/method of analysis
The method of analysis for the study is focused on in this section. It covers the analysis of the ROI or the return on investment, which is the ration of the net present value to the estimate of lifetime costs. The most common analysis done is the SWOT analysis, which stands for Strengths, Weakness, Opportunities and Threats:
- Strengths: What can be done to maintain them?
- Weakness: How can these be overcome?
- Opportunities: How can you take advantage of these?
- Threats: How can threats be overcome?
Overview of alternatives
It covers the possible alternatives to the issues that are highlighted in the study. ‘Staying with the current system’ has to be an alternative in every study. Apart from that, different business pathways and types of computerisations should be proposed as solutions. The disadvantages and advantages of each have to be discussed with clarity, using the set criteria.
The conclusion section in the report restates those conclusions that were mentioned in the comparison section. Here, the individual conclusions are mentioned, like the model, which had the best price, or best battery performance and so on. The aim of this section is to untangle the various conclusions and reach the final one in some way, which is the best choice.
This is the final section of the report. It echoes the most significant conclusions that lead to a recommendation, which is then emphatically stated. The basis for the final judgment that is presented in this section has to be stated in the requirements part.
The questions to be asked in a feasibility study
As explained above, three major sections form a feasibility study, and each sections has some key question that are to be answered. Further reading will help you know what these questions are and how you can use the gained knowledge to formulate your feasibility study.
The key questions that form a part of this section include:
- What is the projected or current demand of your services/products? In a more quantitative sense, what is the range of units that you can expect to be sold every month?
- What are the specific target markets for this service or product? Amongst your potential customers, what are the common demographic features?
- In your selected area, what is the projected/expected supply that you will require for setting up your project?
- What is the existing competition in the market? Do you have a unique selling point that will allow you to establish a niche to effectively compete with others as you provide your service or sell your product?
- Is the location selected for your business/project a factor in its success? If yes, then is the selected site the best one available?
Key Technical and Organisational Issues
The availability and cost associated with technology could be critically important to a project’s feasibility, or it could not matter at all. The key questions to be answered from the technological point of view include:
- What are the technological requirements for the proposed project?
- What is the additional requirement that the project requires?
- From where will you procure the required equipment and technology?
- When will the technology and equipment be available, and will this affect the timeline?
- What will be the cost of this technology and equipment?
- What is the organisational structure that is best suited for your business/project?
- Who will compose the board of directors, and what will be their experience/qualifications?
- What are the skills and qualifications that are necessary for managing the business?
- Who will be managing this business (if possible)?
- What are the immediate staffing needs, and how will these change over the course of the next 2 to 3 years.
Once marketing, technological and organisational issues have been analysed, the last step is to identify and understand the funding streams and financial aspects of your business.
While there are parts of this that you may not be able to answer or accurately calculate at first, they are still important and should be answered to the best possible extent.
- Start-up costs: These costs are what cover the starting up of any new business, as well as land, equipment, buildings etc. These costs may be borrowed from financial institutions.
- Operating costs: These are the costs like rents, wages and utilities, also known as the ongoing costs.
- Projections of revenue: How will you decide upon the costs of your services or goods? Use this to get an estimate of what your monthly revenue will be.
- Sources of finance: If you will be required to borrow money from any financial institution like a bank, then you will need research on these sources, and anything else connected to them.
- Analysis of profit: This forms the basis for the proposed project or business. With every cost mentioned above accounted for, will your business generate sufficient revenue to cover the costs of operations? Will you make a profit, lose revenue or break even?
These great guidelines are essential for formulating a feasibility study report. They will guide you and your project in the right direction with regards to the final implementation of your business, whilst also ensuring that it evolves as you progress through the stages of your business.
Follow these feasibility study steps to increase your chances of owning a successful and lucrative business.