A feasibility study is research that involves the gathering and analysis of relevant data for determining whether or not a particular venture is going to be viable and profitable. It tends to ask and answer two complex questions: ‘is the project doable’? ‘Is it going to be profitable, in spite of all imaginable challenges?’
Its structure considers the project background (rationale, location, ownership and management), regulatory framework, market investigation (regarding demand and supply, product quality, packaging, price, promotion and distribution strategies to adopt), technical analysis (verification of the availability of facilities and resources); as well as the projection of costs, income and cash flows.
The essence of determining the required technical resources is to prevent a blind entry into the new venture, by seeking to find out if there are enough skilled hands, tools, technology, available cash-resources and suitable environment necessary for the venture to succeed. The projection of income against costs would consequently reveal if the business would be profitable. Technically speaking, it is not advisable to stop investigation at the point where there is the likelihood of profitability. Further probe into the risk situation of internal and external factors, and the degree of profitability, is very important to ascertain if the expected profit is good enough and if the business would be able to stand solid in the face of risks or turbulence; at times there may be profit but it may be too small to warrant all the stress. The assessment of the degree of viability and profitability is known as evaluation.
The evaluation part of the feasibility study deals with the analysis of project risk and sensitivity (stability against odds). Risk analysis is important because it seeks to circumvent unanticipated pitfalls. It calculates and measures the broad extent to which actual returns would likely deviate from forecasts, based on emerging, detrimental socio-political and economic external circumstances. Sensitivity analysis is part of risk analysis that helps to identify how sensitive the market is; that is, the extent to which little economic fundamentals could go wrong with the project’s future performance. In other words, it anticipates and measures the minimal impact of various controllable negatives on the project, such as the impact of the longer time it took to introduce a new product or start a business; or the likely impact on profits if lower sales than forecast occurred or if higher costs than anticipated are incurred. If the project is too sensitive, that is, if it would not be viable after the evaluation of minimal impact from identified negatives, the recommendation would be that project promoter should defer or abandon the project in time if no way could be found to reduce the risk. This means that it is always necessary to look at the downside (pessimistic scenario) also because there is no balanced decision making if everyone concentrates on the upside (optimistic scenario). If a project apparently involves more risk, the justification for its continued existence is that it should also promise greater returns; otherwise it would not be advisable embarking on it.
Taking all risks and sensitivity issues into consideration, the evaluation part of the Feasibility Study is tested with practical appraisals, through the use of standard stringent criteria. Payback period is the criterion that is often used to technically evaluate the time it will take to pay back the money that was put into the business. Further methods consider the use of different discounting techniques. For instance, the Net Present Value, NPV, is employed to forecast the future value of the net returns, discounted to the present value. The Benefit-Cost ratio is computed to show the quantified benefits of the venture compared to the costs while the internal rate of return attempts to indicate the minimum or lowest rate at which the project under investigation could borrow to remain profitable. It is the Break-even point of borrowing; different from the Break-even point, which indicates the point, in terms of unit quantity produced or sales value realized, at which all costs are offset and profits begin to come in.
If the evaluation findings show that the costs are going to be more than the profits or the risks are going to overrun the returns, then the project is adjudged not practicable (not technically feasible or commercially viable). With such objectionable verdict, it would be a good idea for the investor to turn attention to another project that is doable.
In conclusion, it could be seen that Feasibility studies are very important because it reveals where and how best the anticipated business will fare, what obstacles may impede its operations and the amount of funding that will be needed to keep it up and running. Most times, a Feasibility Study Report (the report compiled after the study) is required by a financier/ bank as a condition for giving out a loan or credit.
When a BUSINESS PLAN, and not Feasibility Study, is necessary
A Business Plan is a design of how the ideas or strategies of a business will be implemented. The ideas are stated in a written document describing the kind of products or services that the business (usually a start-up) intends to offer, the set of strategies the business will deploy to successfully bring the products/ services to the market, the financing arrangement (budgeting) of how the loans and equity finance would be obtained, utilized and repaid, and the estimation of the profits that would be earned in the course of operations.
A Business Plan is very important because it helps the businessman to plan well ahead of commitments, as proper planning prevents poor performance.
Business Plans are usually done for small companies; however, a new business plan is sometimes created for an established business that has decided to move in a new direction. Although strategies for a small set-up (that is about to commence) or an already established venture that is struggling to survive, are different from those intending to expand. In all instances, strategies are still needed.
Difference between Feasibility Study and Business Plan
Feasibility study determines whether to go ahead with the business or not; whereas business plan is designed to steer the business in a desired direction, after the decision to go ahead has already been made.
Essentially, feasibility studies are research projects (seeking to find out if the business should be established in the first place), whereas business plans are projections for the future (suggesting ways and how the business should be sustained).
The feasibility study helps determine whether an idea or business is a viable option. A feasibility study is filled with calculations, analysis and estimated projections (that go to verify if the business has all it takes to operate successfully) while a business plan is made up of mostly tactics and strategies to be implemented in other to grow or sustain the business.
Start-up companies (that have conducted the Feasibility Study to get off the ground) further use the business plan, as a better instrument to define their pathway or attract additional capital from external investors.
Although business plans are drawn in situations when the feasibility prospects of a business have already been ascertained, and you cannot draw a business plan when you have not found out if the business is going to be feasible or not; however, it is possible to combine Feasibility Report and Business Plan as one single document.
HOW ABOUT ‘STRATEGIC PLAN’?
At times, you hear about ‘Strategic Plan’. In that instance, it is not just marketing, writing business plans, resourcing or budgeting. While strategic plan touches on all of these things, it is different in one very important and basic way; it deals with the most fundamental question in every big company’s life – where does the company want to go and how does it want to get there? It is after the company has decided the future direction in which it is heading that a business plan may be drawn. Business plans are concerned with the details of the implementation after the big fundamental (strategic) choices have been made.
This means that for a big business, strategic planning is necessary, and follows immediately after the feasibility study; while the business plan comes last. Importantly too, strategic plan deals with the whole company while the business plan deals with detailed implementation of one specific aspect of the strategic plan. In a conglomerate (group of companies), the business plan is concerned with the implementation of just a single subsidiary at a given time. This implies that if you have ten subsidiaries in a conglomerate, you will do one strategic plan but ten business plans. Strategic plan is expensive and tasking; hence, it may not be necessary for a single small business.
MARKET STUDY: what purpose does it serve?
Market Study or market research is simply an investigation into what is going on in the market place, with a view to ascertaining prevailing prices of the competition, discovering opportunities and converting those opportunities into profits. Hence the concern of market study is largely about the extent to which demand exceeds supply and how existing suppliers fall short of satisfying the consumer, in terms of product quality or service offering and pricing. For this reason, market study poses such probing questions as: who are the consumers of the particular product or service? What are the tastes and preferences of these consumers and how do they respond to price? Who are the key players or operators or suppliers? What strategies are they employing that make them survive or retain strong positions in the market place? How are the products and services differentiated and distributed to meet customer satisfaction? What are the key players not offering well? Does a gap exist? Where the key players are not doing well, how can a new entrant, with all the resources he can muster fill the gaps or take away a sizeable share of the market? What is the average price of the competition?
Data generated from the market research is analysed and information derived from the analysis is used to develop new strategies needed for penetration into the market.
Although market research is an integral part of the business planning process, it becomes an ‘independent market study’ or ‘in-depth market study’ when details are called for. Independent Market Study is common among companies introducing new consumer, industrial and technological products.
Market research involves two types of data: primary data (involving direct questioning); and secondary information (compilation of ready-made reports and studies by government agencies, trade associations or other businesses, whose findings previously responded to some of the issues in the market).
The conduct of primary market research may be exploratory (broad) or specific (focused). Exploratory or broad research is open-ended, meant to define a broad-based problem, and usually involves detailed, unstructured interviews in which lengthy answers are solicited from a small group of respondents. On the other hand, specific or focused research is precise in scope and used to solve a definite problem that exploratory research has identified. Typical examples are structured interviews, which are formal in approach and more expensive too.
When conducting primary research, there will be need to plan how to question the targeted group (sample respondents) either by direct mail, telephone or face-to-face interviews; or in the current dispensation, by on-line approach.
Word of caution
It is usually advisable to engage the services of a competent consultant for the conduct of a Feasibility/ Market Study or preparation of a Business or Strategic Plan. The author would be willing to offer such assistance to interested investors, and may be reached via his email address: chukwudiodili@yahoo.com
