Feasibility Study – A Guide for Critical Decision Making
Sherin , Senior Consultant
7 February, 2021
Research has shown that there are two main reasons behind the downfall of new business ventures. The first is that they fail to offer a product or service the market wants at the right time and second, that the business simply ran out of the cash it needed for business continuity either because its product/service did not have the expected success, or it had overlooked certain key assumptions relating to market demand and operating costs.
If you have a great idea to start a new business or intend to develop an idea within an existing business, thorough research is essential. You need to find out if:
- There is a market for your idea.
- Your idea is financially viable.
Any new business starts with an idea because of certain circumstances or need.
Let us look at the examples of Airbnb and Uber. They both started at the right time, i.e., during the 2008 recession, the circumstances demanded it, because people who lost their jobs due to recession needed to survive through making extra cash, where Airbnb allowed homeowners to let out room for travelers while Uber allowed anyone with a car to become a cab driver. Regardless of the origin of the idea, it is necessary to conduct certain market research to ensure the success of the business and the achievement of profits; this means to prepare feasibility study for the project. The decision to conduct a feasibility study should not be taken lightly as it is a time-consuming process. However, not doing a feasibility study can be more expensive in terms of the poor decisions made resulting in failure of the business altogether.
A feasibility Study is largely number driven and ultimately tests the viability of an idea or a new business opportunity. By assessing the market for your concept, market competition, estimating financial viability, and identifying potential pitfalls, you can make an informed choice about the achievability of your entrepreneurial endeavor.
To effectively conceptualize the business plan, the entrepreneur must have some initial and promising knowledge before beginning a detailed feasibility report. This is a pre-feasibility stage that can be achieved by brainstorming sessions with friends and family members in a confidential circle. If this is complete, you can move on to the feasibility study once the concept seems to receive a good response.
The elements to include in a feasibility study vary according to the type of business venture and the kind of market opportunities identified. But the steps listed below are main phase of any feasibility study process:
- Market FeasibilityThe first step in the feasibility study is to study the factors affecting supply and demand. The market feasibility study is an important step to complete the next phase. It is necessary to identify the market in which the product will be sold and check whether market is controlled by intense competition. Understand whether the product/service add value for an existing product/service or is it produced for the first time in the market. It is also necessary to identify the consumer for the product/service offered and the income group, target consumer age group, gender, and other consumer characteristics so that the demand for the product/service can be accurately estimated.
- Technical FeasibilityIn this phase generally a group of engineers or technical experts study the project’s technical aspects. They assess the technology, machinery and technical equipment required to go forward with the business and fully meet the estimated market demands. An important element in the technical feasibility study is to determine the production capacity to meet the estimated demand i.e., estimation of raw material and labor requirements. The number of employees varies from one business to another depending on the nature of the business. Based on this analysis a decision on whether the technical resources are available to convert the idea into reality shall be arrived.
- Financial/Economic FeasibilityThe final phase of the feasibility study is to prepare cash inflow and outflow forecasts based on all the evaluated market and technical details. The financial forecasts will assess the cost of the project, sales & profits, return on investment, investment payback period, etc. Financial viability is a key factor for investors to participate in a new business venture, so invested capital must demonstrate the potential to produce an economic return for investors at least equivalent to that available from other equally risky investments.
The precision and reliability of the study of financial feasibility depends on the accuracy of the data used. As the business idea evolves and passes through pre-feasibility, market feasibility and technical feasibility stages accuracy of information being used in financial feasibility stage will be much reliable than during idea inception stage. Calculations of financial feasibility need to be performed with utmost caution and the complexity of assumptions depends on the number of different variables to be considered relating to revenue, operating & capital costs, structure of financing, etc.
Once the financial projections are accurately estimated, it also makes it easier to conduct sensitivity analysis on key parameters, which makes it possible for investors to envision different scenarios and possibly mitigate risk associated with these parameters.
The decision to go/no-go is one of the most important in a new business concept. Once you have decided to pursue a business idea, then a feasibility study will be a major information source in making this decision. The findings of the feasibility study should outline the several different scenarios which will allow you to carefully analyze the financial results and challenge the underlying assumptions so that you are convinced about the business concept. This is the reason why a properly developed feasibility study is critical in business decision making.
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