how to write a feasibility study
A business feasibility study format can be as simple or complex as you desire. Simply, it is an examination of your business model. You are checking that it is possible to make a profit from your intended business.
When considering how to write a business feasibility study, it is important to consider three main areas of the business:
- market environment - is there potential for your product or service to return a profit?
- technical and operational requirements - what equipment or human resources will the business need to have access to, at what cost, in order to return a profit?
- financial projections - what are the expected expenses and incomes of the business, including sales and advertising projections? How long will it be until the business breaks even?
Market Potential Assessment
A business (or product/service) is assessed as feasible if it can be shown that there is sufficient market demand - that is, that you can show there are enough customers in your geographic/target market who will purchase a sufficient quantity of products/services to estimate that your business will return a profit.
A simple method of determining market demand is the 6 Step Market Potential Assessment Tool, shown below.Download this tool from the Feasibility Analysis Tools page >>
- Are you selling to individuals, households or businesses?
- What is the population of these customers in your target geographical location?
- How much, in an average year, do customers spend on your product/service?
- What are total sales for the region?
- How much is currently purchased in the region?
- Is there space in the market for new players?
This list of questions acts an initial 'screen' for your business concept. If at the end of the process you have decided that there is not space in the market (that being, your type of customers in your target location) then you should make a choice; either, target a different type of customer or different geographical catchment where there is space for your business; or drop the idea.
Many business owners fall into a trap of confusing zeal with ability. They are convinced that their product is so much bigger and better than the competition, that they believe they can enter a saturated market and survive... and they might. But in a financial arena where 80% or more of businesses do not survive the first five years, they would be wise not to subject their startup to the additional burden of trying to grow in a heavily competitive market. It is much better to be entering a market where demand outstrips supply - in this environment, customers are much more likely to buy your product, with less effort on your part.
Other important considerations include:
- What stage of the product life-cycle is the target population in? Is it a new industry? or mature industry? A mature industry may mean the market has been saturated, or that sales are no longer growing, and may even be falling.
- Is the market dominated by a few large players, or is it fragmented and met by hundreds of smaller players? A monopolised market (for example, grocery retail) is difficult to break into, as the major players have the financial backing to compete in the short term on price, until smaller businesses can no longer survive. Conversely, a fragmented market (such as mechanics or hairdressers) is much easier to establish - all that needs to be done is to find a geographic area that is not currently serviced.
- Is competition based around price or value? If the product has been commoditised and customers make their decisions based on price alone, it can be difficult for a new player to achieve sufficient sales to survive while they get established. However, if customers are looking for value, price is less important, and a smaller player who has superior customer service may be able to find a niche.
Technical and Operational Assessment
A business is considered technically and operationally feasible if it has the necessary expertise, infrastructure and capital to develop, install, operate and maintain the proposed system, and that by establishing such a system, the business will be able to deliver goods or services at a profit. When considering a new business, it is important to consider if there is sufficient access to resources. One of the primary reasons that new business fails is under-capitalisation - not enough money to keep the business going from startup until it starts to make a profit. This can lead to a lack of resources.Download this tool from the Feasibility Analysis Tools page >>
- What type of equipment and technology will the business need to produce its product/service?
- What costs are involved to purchase and set up the equipment? What are the costs involved in the ongoing running of the equipment?
- Who are the potential suppliers of the equipment?
- Where are they located?
- What sort of service and warranties do they provide?
- How long will it take to acquire the equipment and begin operations?
- Based on your projected sales, how much raw material will you need?
- What quality material do you need?
RAW MATERIALS SUPPLIERS:
- Who are the potential suppliers of the materials?
- Where are they located?
- What sort of service and guarantees do they provide?
- How long will it take to acquire the materials and begin operations?
- How much credit is accessible - can you easily set up an account with the suppliers?
- What are possible locations for the facility (office/manufacturing plant)?
- What size facility is needed?
- What are the costs involved in the building? Do you need to fit it out? How much will it cost to get all necessary utilities connected?
- Does the proposed location have adequate access to infrastructure and services such as highways, railway and utilities?
- Will you need to build your own facility, or purchase an existing one?
- Where will the facility be located in relation to your customers?
- Who will be responsibile for transport of goods between the facility and the market? What are the costs involved?
- What organisational structure is appropriate for this business?
- How important are delivery contracts and a fixed source of supply to the success of the business?
- What qualifications are needed to manage operations?
- What are the key staff positions that need to be filled?
- What experience does management need to have?
- How easy is it to find potential candidates with the required qualifications and experience?
- How much will it cost to find AND retain acceptable candidates?
A business or project may be regarded as economically feasible if it is able to produce goods/services and distribute them to the marketplace and still return a profit to the owners.
The following costs and income should be considered:Download this tool from the Feasibility Analysis Tools page >>
- What are total start-up costs needed in order to begin operations?
- Cost of land, plant and equipment
- Legal costs in setting up a company structure
- Accounting costs
- What are the day-to-day operating costs involved?
This will show you the cashflow requirements of the business.
- Interest payment on debts
- Based on estimated demand (sales) what is the business's projected income?
- How will you determine your pricing arrangements?
- What are possible sources of financing?
Who are potential lenders? What will their terms and limitations be?
- Bank loans
- Accounts with suppliers
- Venture capital
- Based on estimated revenues and costs, what is the projected profit/loss of the business over the first five years?
- When does the business break even? (Aim for no longer than 18 months)
If a business is able to 'pass' all of the above criteria, then there is potential for a successful business. However, it is important to remember - just because a business has potential, does not guarantee its success.Go to the feasibility analysis tools page to view these and other tools to help you in your feasibility analysis and study.