Early in the process of exploring an idea for a new venture or business expansion, it is smart to conduct a feasibility study. This helps you to determine if the venture is worth pursuing, before committing time, money, and effort.
Evaluate Your Business Concept
Conducting a feasibility study is important for making the go/no-go decision about moving forward. The key question you’ll be answering is: “Does this make business sense?”
The preliminary analysis addresses the possible roadblocks that may stand in the way of success.
If the results are positive, you can then proceed with more comprehensive business planning.
However, if the results show that the venture or project is not viable, then it’s back to the drawing board. You may even have to consider abandoning it altogether.
A negative outcome of the feasibility study is often difficult to accept. However, it is better to find out sooner rather than later that the business concept is not viable before time and money are invested in a venture with little upside potential.
Don’t Ignore the Need For a Feasibility Assessment
Overlooking the need for carrying out an initial evaluation is tempting. Entrepreneurs are often guilty of this. The concept was their idea so they’re inclined to think that it makes business sense. So, why conduct a study just to prove what they think they already know?
However, an unbiased feasibility study is important because it forces you to put everything on paper and determine objectively whether or not the concept is realistic. In addition, it makes you think about the next steps.
You’re probably capable of conducting the feasibility study yourself. But, the smart thing to do is to work with a consultant. A consultant brings an unbiased, fresh perspective and is better positioned to conduct an objective evaluation. In addition, through their questions, a consultant may expose blind spots in your thinking.
When Should You Carry Out an Assessment?
These are the situations where it makes a lot of sense to conduct an initial economic evaluation of the business concept:
- Launching a new business – If you have an idea for a new business, figure out if it’s viable, before committing time and money. You should not launch the business without understanding the chances of success and the risks involved.
- Developing a new product – Developing a new product and taking it to market involves considerable planning and requires a lot of company resources. You want to make sure there is sufficient demand for the new product and that you can sell at a profit, even before starting product development.
- Entering a new market – Entering a new market is a significant challenge, both financially and in terms of management effort. The risks can also be quite high. Be certain there is sufficient demand for your products to make entering a new market a profitable endeavor.
- Expanding the business – Expanding the business can be done in a number of different ways. Which is best? What are the risks? Is it going to be worth it? Will you be able to earn an ROI on the invested capital?
- Making a significant investment – Before making any significant investment, you want to have confidence that the performance objectives of the investment are going to be met. If the initial economic evaluation looks positive, you can then proceed with a more detailed review.
- Considering an M&A initiative – Merging with another firm or acquiring a firm are some of the most challenging initiatives an organization can undertake. It takes significant effort and the risks are high. Make sure you get an early indication of whether pursuing the M&A opportunity is worthwhile.
What Does a Feasibility Study Cover?
A comprehensive evaluation should cover all major and relevant aspects that have an impact on the opportunity’s viability. Topics include:
Clarity about the goals and objectives is important to determine if the new venture or concept makes business sense. Overly aggressive goals should be scaled back for the concept to become viable. On the other hand, you may find that the market potential is actually bigger than expected and you can set your goals higher.
Products and services
Which products and services are you going to sell to your target market(s)? Do you have a clear picture of what your firm will be offering to your customers? What you plan on selling may need to be refined in order to improve the chances of success.
Market demand and competition
This phase is absolutely critical in the evaluation. It involves reviewing market potential, target markets, number of prospective buyers, market size, and market growth rate, to name a few. Without a market that is large enough, preferably growing, it will be difficult to make a profit. It all comes down to the key question “Are we going to be able to make money?”
Insufficient demand for the products and services and an inability to differentiate from the competition reduces your ability to compete with established industry players. In that case, the proposed venture should not be pursued.
Questions that need to be answered include:
- In which type of industry will the business operate? Key characteristics? What is the state of the industry? Mature, growing, or in decline?
- What are the possible target markets for the products and services? Do we know the demographics? How large are these markets? Where are they located? Are these markets growing, stable, or in decline?
- Who are the main competitors? How big and established are they? What is their pricing strategy? How will they react to you entering the market?
- How are you going to differentiate your products and services from the competition? What are the competitors’ strengths and weaknesses, and how do you stack up against them?
- How will the company gain market share?
Data sources such as government publications, trade journals, industry reports, internet resources, or companies such as Dun & Bradstreet can provide answers to these questions.
Armed with the answers to market-related questions, you can then develop more realistic estimates of the projected demand for the products and services. In turn, you’ll be able to make the organizational and operational decisions on how demand is going to be met. If the estimated sales volume is insufficient, the project is likely not feasible.
Manufacturing and service delivery
It is also important to think about how you are going to manufacture your products and deliver your services. Topics to consider include:
- What equipment and technology are needed? What are the costs involved? These costs include both the initial purchase and installation costs of equipment as well as the cost of operations.
- Who are the potential equipment suppliers? Where are they located? What sort of service and warranties do they provide? How long will it take to acquire the needed equipment and begin operations?
- Which parts and raw material will have to be purchased? How much? What are the quality specifications?
- What is the best location for the new venture’s facility? Do you already have a location in mind? How large should the facility be? What are the costs of the building? Does the proposed location have adequate access to infrastructures and services such as major highways, airports, railways, and utilities? Does it make sense to lease, buy, or build?
- What will the supply chain look like? Which distribution channels will be needed? What are the costs involved?
A key objective of assessing the viability in the first place is to develop a better understanding of the risks involved in the business venture.
What could go wrong and what are the consequences? Are the risks manageable or do they significantly jeopardize the chances of success of your business idea?
If too many unknowns remain, or the risks are too great, you may want to rethink moving forward with your business concept.
Creating sales forecasts and proforma financial statements are important for the evaluation of the business concept. The numbers will show if your business is likely to become profitable and how quickly.
Questions that need to be considered include:
- What are the total start-up costs required in order to begin operations? For instance, what are the capital costs of the land, the facility, and equipment, and other start-up costs such as legal and accounting costs?
- What is the cost of operations? These include costs such as wages, rent, utilities, and interest payments on outstanding debt. All of these have an impact on your cash flow requirements.
- Based on the estimated demand, what are the revenue projections? What prices to charge?
- What are the possible sources of financing for the venture? Who are the potential lenders or investors? What will be the terms and limitations of borrowing?
- Based on the estimated revenues and costs, what is the projected profit (or loss) for the first few years? What is the Break-Even sales level? If you can’t reach a Break-Even sales volume, you have a serious problem and should rethink your concept.
Organization and management
You need to have an initial understanding of the organizational form of the business and the management team that will be leading the venture.
- Is the proposed organizational structure the right one for this business?
- Key staff positions that need to be filled?
- Required management experience and qualifications? Who are the potential candidates to fill such positions? What is the cost of finding and retaining acceptable candidates?
- What are the staffing and training needs?
Avoid Bias, Be Honest and Objective
It is all too easy to fall in love with your own idea for a new business or project. However, this makes you biased towards a positive outcome while conducting the feasibility study. You’re likely to see the opportunity through rose-colored glasses and ignore or downplay any warning signs. For the feasibility study to have any real value, it is important to be honest and objective.
This is a key reason why you should consider working with a consultant. Because the venture is not their “brainchild”, a consultant can provide an objective, unbiased perspective, improving the value of the feasibility study.
Hopefully, this gave you a flavor of the kind of topics covered by a feasibility study.
Save yourself a lot of time, money, and aggravation by determining the economic viability before committing resources to business planning. Find out what your chances of success are before pulling the trigger. This insight is important for the critical go/no-go decision.
If the results indicate that the proposed venture is economically viable, you can then move on to the next stage of developing your business idea.