News for Startup Businesses

Why do a feasibility study before venturing into a new project/ business?

A feasibility study is an analysis that takes all of a project’s relevant factors into account—including economic, technical, legal, and scheduling considerations—to ascertain the likelihood of completing the proposed project successfully while evaluating and analyzing the actual potential of the project. It is based on extensive investigation and research to support the process of decision making.

Project managers use feasibility studies to discern the pros and cons of undertaking a project before they invest a lot of time and money into it. Feasibility studies also can provide a company’s management with crucial information that could prevent the company from entering blindly into risky businesses.

A feasibility study will help you to determine the profitability of the business venture. Before starting a business, seasoned entrepreneurs and investors would want to know if the business would be worth their time, effort and resources. A feasibility study will help prove to the entrepreneur, venture capitalists, lenders and investors the existence of the market, the liquidity of the business venture and the expected return on investment.
It will help you identify the flaws, challenges, strengths, weaknesses, opportunities, threats and unforeseen circumstances that might affect the success and sustainability of the business venture.

It is a true fact that a great lot of business failures and losses would have been avoided if entrepreneurs spend adequate time and resources prior to starting off a business for carrying out a comprehensive feasibility study. Before starting a business, a feasibility study will enable you estimate the financial, human and technological resources that will be needed to ensure the successful launching of the business. It helps determine the number and level of skilled or unskilled workers to be employed and their salary scale and the amount of capital required to start the business. It will also help you in establishing the budget plan, working capital and cash flow projections of the business.

Feasibility studies aim to objectively and rationally uncover the strengths and weaknesses of an existing business or proposed venture, opportunities and threats present in the environment, the resources required to carry through, and ultimately the prospects for success. In its simplest terms, 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.

A feasibility study evaluates the project’s potential for success; therefore, the perceived objectivity is an important factor in the credibility to be placed on the study by potential investors and lending institutions. It must therefore be conducted with an objective, unbiased approach to provide information upon which decisions can be based.

The key aspects of a feasibility study are outlines below:

– Technology and system feasibility

The assessment is based on an outline design of system requirements, to determine whether the company has the technical expertise to handle completion of the project. At this level, the concern is whether the proposal is both technically feasible.

– Legal Feasibility

This determines whether the proposed system conflicts with the relevant legal requirements governing the particular industry.

– 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 requirement analysis phase of system development.
The operational feasibility assessment focuses on the degree to which the proposed development projects fits in within the existing business environment and objectives with regard to development schedule, delivery date, corporate culture, and existing business processes.

– Economic Feasibility

The purpose of the economic feasibility assessment is to determine the positive economic benefits to the organization that the proposed system will provide. It includes quantification and identification of all the benefits expected. This assessment typically involves a cost/ benefits analysis.

– Technical Feasibility

The technical feasibility assessment is focused on gaining an understanding of the present technical resources of the organization and their applicability to the expected needs of the proposed system. It is an evaluation of the hardware and software and how it meets the need of the proposed system.

– 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 timeline is. The question to be answered 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.

– 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
  • Projected cash flow and profitability
  • Project’s funding potential and repayment terms

– Market research study and analysis

This is one of the most important sections of the feasibility study as it examines the marketability of the product or services and convinces readers that there is a potential market for the product or services. If a significant market for the product or services cannot be established, then there is no project. Typically, market studies will assess the potential sales of the product, absorption and market capture rates and the project’s timing.

The conclusions of the feasibility study should outline in depth the various scenarios examined and the implications, strengths and weaknesses of each. The project leaders need to study the feasibility study and challenge its underlying assumptions. This is the time to be skeptical.

Don’t expect one alternative to “jump off the page” as being the best scenario. Feasibility studies do not suddenly become positive or negative. As you accumulate information and investigate alternatives, neither a positive nor negative outcome may emerge.  The decision of whether to proceed is often not clear cut. Major stumbling blocks may emerge that negate the project. Sometimes these weaknesses can be overcome. Rarely does the analysis come out overwhelmingly positive. The study will help you assess the tradeoff between the risks and rewards of moving forward with the business project. It has to be noted that it is not the purpose of the feasibility study or the role of the consultant to decide whether or not to proceed with a business idea. It is the role of the project leaders to make this decision, using information from the feasibility study and input from consultants.