Developing Feasibility Studies and Business Plans

Developing Feasibility
Studies and Business
Points to be Pondered…
What is a Feasibility Study?
What is a Business Plan?
How do they differ?
What Resources are available to help
develop each?
– Are all Studies created Equal?
What is a Feasibility Study?
• A feasibility study is an analysis of the viability of an idea
through a disciplined and documented process of thinking
through the idea from its logical beginning to its logical end.
• A feasibility study provides an Investigating function that
helps answer “Should we proceed with the proposed project
idea? Is it a viable business venture?”
• A feasibility study should be conducted to determine the
viability of an idea BEFORE proceeding with the development
of a business.
Levels of Feasibility Assessment
• A feasibility study of an idea is conducted at
three levels
– Operational Feasibility (Market)
• “Will it work?”
– Technical Feasibility (Technical)
• “Can it be built?”
– Economic Feasibility (Financial)
• “Will it make economic sense if it works and is
• “ Will it generate PROFITS?”
Why do a Feasibility Study?
• Provide a thorough examination of all issues and assessment of
probability of business success
• Give focus to the project and outline alternatives
• Narrow business alternatives
• Surface new opportunities through the investigative process
• Identify reasons NOT to proceed
• Enhance the probability of success by addressing and mitigating
factors early on that could affect the project
• Provide quality information for decision making
• Help to increase investment in the company
• Provide documentation that the business venture was thoroughly
• Help in securing funding from lending institutions and other
monetary sources
Data Sources for a Feasibility Assessment
• Data required for a feasibility study can
come from primary or secondary sources
– Primary data can include formal interviews and
• Collection of primary data can be expensive and
time consuming
– Secondary data can include industry and trade
publications, statistics of industry associations,
and government agency reports
Steps for an Economic Feasibility Study
• Identify and Estimate all Capital Expenditures
• Identify and Estimate all Variable Costs related to the Proposed
Business Venture
– Identify People and Skills required to operate
• Determine Wages, Salaries, and Benefits
• Identify and Estimate Project Related Costs
Infrastructure development or improvements
Advertising and Promotion
Legal Fees
Municipal & State Development taxes
• Identify and Estimate all Fixed Costs
Estimating Total Capital Requirements
– Assess the “seed capital” needs of the business project and how these
needs will be met
– Estimate capital requirements for facilities, equipment and inventories
– Replacement capital requirements and timing for facilities and equipment
– Estimate working capital needs
– Estimate start-up capital needs until revenues are realized at full capacity
– Estimate contingency capital needs (constructions delays, technology
malfunction, market access delays, etc.)
– Estimate other capital needs
Equity and Credit
• Estimate Equity and Credit Needs
– Identify alternative equity sources and capital availability
• Producers, Local Investors, Angel Investors, Venture Capitalists
– Identify and assess alternative credit sources
• Banks, Government (direct loans or loan guarantees), Grants, Local
and State Economic Development Incentives
– Assess expected financing needs and alternative sources
• Interest Rates, Terms, Conditions, Covenants, Liens, Etc.
– Debt to Equity Levels
Cost-Benefit Analysis
Utilize data collected to determine economic feasibility:
Estimate Expected Costs and Revenue
Estimate the Profit Margin and Expected Net Profit
Estimate the sales or usage needed to break-even
Estimate the returns under various production, price and sales
levels to create a “sensitivity analysis”
Assess the reliability of the underlying assumptions of the
financial analysis
Benchmark against industry averages and/or competitors
Identify limitations or constraints of the economic analysis
Project expected cash flow during the start-up period
Project income statement, balance sheet when
reaching fullEXPENSE
What Defines Feasibility?
• A feasible business venture is one where
– the business will generate adequate cash flow and
– the business will withstand the risks it will
– the business will remain viable in the long-term,
– the business will meet the goals of the founders.
The marketing analysis will include:
•Strategic marketing: Reviewing the enterprise’s business strategies and it related marketing
strategic intent if exist.
•Marketing functions attributes: assessing the existing marketing function structure, operations,
people ...etc.
•Markets analysis attributes: Conducting an overview of the international and national markets of
the enterprise and conducting a market analysis for its major products, competitors, suppliers and
•Market size, sales volume and company’s share attributes: Determining market shares, growth
rates, trends, market requirements, etc. and analyzing the turnover (per product, year, local,
export…),, sales volumes, value in JD, and percentage of the products marketed and their
•Marketing Mix (4Ps) attributes: Assessing marketing performance and conducting product,
pricing, promotion and distribution (place) mix analysis.
1.Products attributes: Analyzing the enterprise’s market products product range/mix.
2.Advertising and Promotion: assessing the current tools and techniques for promotion and
3.Pricing: reviewing the current pricing policy.
4.Distribution (place): assessing distribution channels and communication policies.
•Customers attributes: identifying the current and potential customers and identifying their
•Competitiveness attributes: identifying major competitiveness factors (including, but not limited
to, manpower, technology, delivery conditions, design, procurement and marketing)
•Benchmarking attributes: Conducting a benchmarking analysis based on benchmarking factors
for each product range, market segmentation (designer labels, expensive brands, average prices,
medium quality, low prices-low quality, etc)
The Technical Audit will include:
•Products technical attributes: identifying all types of products, characteristics, types and use.
•Materials attributes: Analyzing the current types of products and their materials, their
characteristics and sources.
•Processes attributes: assessing the current technologies, processes, fabrications, tools, and
techniques for producing the products.
•Factory premises attributes: assessing the availability of space required for production, storage,
maintenance and utilities.
•Factory layout attributes: assessing the current layout status and its relationship with the
handling system and the work station organization.
•Machines attributes: identifying the nominal and actual capacity, age, and trade mark of each
machine in the company.
•Productivity attributes: the productivity level within the company compared to its competitors.
•Production planning and control attributes: assessing the existing system used for production
planning and control and operations management system components.
•Safety and Maintenance attributes: identifying the used safety policies, preventive vs. corrective
maintenance activities and policies.
•R&D attributes: assessing the existing R & D activities and areas of concern.
•Procurement and inventories attributes: identifying the current inventories policies, inventory
management system characteristics, Procurement procedures and suppliers relationships.
•Logistics and materials management attributes: evaluating the existing materials management
and logistics system and its network.
•QM attributes: assessing the existing quality control, assurance and management system.
•Cost analysis attributes: analyzing the operational cost and costing system.
•Environment/Energy attributes: assessing the current activities for environment and energy
protection and concerns.
The Financial Diagnostic will include:
•Financial management system attributes: assessing the current financial system
structure, components, resources, procedures and staff.
•Accounting system attributes: evaluating the current accounting system and the
used procedures.
•Financial statements attributes: analyzing the existing income, balance sheet and
cash flow statements.
•Debt attributes: identifying the company’s current debt status and repayment schedule
and related collateral, for the last five years (if exist).
•Ratios analysis attributes: analyzing the financial situation of the enterprise through
conducting the following analysis by ratios:
•The analysis of assets and liabilities structure
•The cost and expenses breakdown analysis of manufacturing, general &
administrative, sales & marketing, etc.
•The value added analysis
•The working capital analysis
•The liquidity ratios
•The activity ratios
•The debt (leverage) ratios
•The profitability ratios.
•Financial restructuring attributes: formulating a plan, if needed, to ensure proper
cash flow management.
What Next?
• After the feasibility study has been completed and presented to
the leaders of the project, they should carefully study and
analyze the conclusions and underlying assumptions
• Next they will decide which course of action to pursue
– Potential Courses of action include
• Choosing the most viable business model, developing a business plan and
proceeding with creating and operating a business
• Identifying additional scenarios for further study
• Deciding that a viable business opportunity is not available and moving to
end the business assessment process
• Following another course of action
Developing a
Business Plan
What is a Business Plan?
• A Business Plan summarizes the plan of action after a
course of action has been determined through the
Feasibility Study
• A Business Plan provides a Planning function
• A Business Plan outlines the actions needed to take the
proposal from “idea” to “reality”
• A Business Plan tells How your business will be created
and Why it will be successful
• A Business Plan provides a road map for
Why Write a Business Plan?
• Put the Pieces Together—Do the pieces fit together
in a logical manner?
• Create a Blueprint for Action
• Focus Founders and/or Management Team
• Obtain Financing
• Attract Equity Investment
• Attract Key Managers and Employees
• Obtain Contracts
• Create Joint Ventures, Mergers, Acquisitions
What is included in a Business Plan?
• A Business Plan should be brief, concise & straight to the point
• Main Requirements May Include
Industry Description
Market Size
Customer Base
Competitive Advantage
Business Location
Three years of Financial Projections
Monthly Tracking of First Year Financials
Management Experience and Profile
Personal Statement of Affairs
Other Sources of Cash, if any
How Effective Is the Business Plan?
• How effective a Business Plan is depends on how well
the following questions are answered:
Who are we?
What do we do?
What do we have to offer?
Why will someone pay for our products/service?
What resources do we have?
Where are we going?
What do we need to get there?
Why will we be successful?
Why should someone participate or invest?
How will we measure performance?
The Story a Business Plan Tells…
• Business Plan should be tailored to the stakeholders
• Be aware of each potential stakeholder’s priorities
• Make sure all priorities are addressed in a balanced
manner in the business plan
• If more than one version of a business plan is written,
make sure each tells the SAME story only with
difference emphasis
Who is the “Target” of a Business Plan?
Issues to
Issues to
Cash-Flow, Assets,
Solid Growth
Fast Growth, Hot
Fast Growth Potential
Assets, Large Market,
Management Team
Strategic Partner
Synergy, Proprietary
Sales Force, Assets,
Large Customers
Stability, Service
Fast Growth, Hot
Key Employees
Security, Opportunity
Merger & Acquisition
Future Outlook
*Portable MBA for Entrepreneurship, William B. Bygrave, John Wiley & Son, Inc., 1994
Feasibility Study vs.
Business Plan
• Feasibility study answers the bottom line question—Is this
venture going to make money?
• Feasibility study outlines and analyzes several alternatives or
methods of achieving business success
• Feasibility study is conducted before a business plan
• Business plan is prepared only after the venture has been
deemed to be feasible
• Business plan deals with only one alternative or scenario that is
determined to be the “best” alternative
• Business plan considers the management side—goals and
objectives of the planned business venture
What resources are available to help
develop each?
• Hired Business Consultants
– Make sure an accurate assessment is given
– Make sure someone is not paid to give the answer the group
wants to hear
– Can be costly
• Third Party Unbiased
– Universities
• Center for Agribusiness & Economic Development
• Small Business Development Center