A business feasibility study is crucial before you start any new venture. It is a necessary stage of fact-finding to assess the potential of your concept for a small business. If the idea is a ‘goer’, the feasibility study leads to a detailed business case. The feasibility study assesses if, and under what circumstances, the business will work and how successful it could be.

A properly constructed feasibility study will tell you:

• what return, if any, the business will give
• what effort is involved and what actions are required
• what risks are involved
• how deep your pockets need to be
• how secure your financial investment will be

A feasibility study can increase your chances of success or, and this is just as valuable, may prove that your proposed business was never going to work.

A wise approach is to look realistically at how your new venture may go and then halve the projections you make – then see if it is still feasible. Many people starting a business have rose-coloured glasses. Take them off!

What feasibility studies will tell you

The feasibility study will tell you:

• for an existing business, whether the asking price can be justified, or what will the impact be on your existing resources as you fund the new project
• the appropriate amount of funding required in terms of initial capital and cash outlay, how long before the business reaches break-even and then the extent of expected profits and cash flow, if it survives the initial start-up traumas
• the management and business skills needed – any deficiencies you may have and what it will take to address. This exercise will also consider issues like employing, managing and training staff, dealing with customers, pricing and marketing, etc
• the legal issues that must be addressed, the appropriate legal entity, use of patents, trademarks, trade names, business names, contracts, leases, supply agreements, etc.

If you’re starting a new project or business, the feasibility study asks the obvious questions:

• Why would customers switch to your business?
• What will you offer (other than lower price) that would draw competitors’ customers to you and generate the cash flow you need immediately to open the doors?

Potential revenue

The first unknown in your feasibility study is the level of activity and revenue your business will produce, short and long-term. This affects your income – how quickly or slowly the business will take off (whether it can reach its break-even level) and then go on to sustain your desired lifestyle needs.

The following revenue assumptions will determine the feasibility / success of your business:

• Pricing policy: premium or discount pricing? Do you discount to loyal customers? If so, how much?
• Competitor reaction: any win will be made at the expense of existing competitors
• Marketing strategies: what programs and commitments are implemented?

Competitors

When you are starting out, you’re not the only small business in the marketplace! Any client with whom you do business or any customer who buys your product will have to choose your business over others. An honest review of your existing and potential competitors is fundamental to success.

Understand what current competitors are likely to do in the face of your new operation that could trigger a price war, special promotional offers, new marketing program or new branding.

Business environment

The general business environment will affect your business, so study that environment for both revenue and expenses.

Economic conditions

• rising or falling unemployment, availability of labour
• inflation
• interest rate movements or exchange rates
• rate of growth in business, particularly your operational area
• business sentiment

Technological impact

• how advanced communications affect the business
• rate of growth in advanced technology

Political and commercial factors

• government regulation or control in your area of expertise or the businesses / organisations you will be dealing with
• rates of taxation or new taxation regimes

A useful list of external aspects to ‘keep your eye on’ includes:

• competition, old and new
• seasonal conditions (floods, droughts, bushfires)
• interest rates
• inflation
• wages and employment conditions
• availability of finance (e.g. credit squeeze)
• consumer spending / confidence
• taxation policy
• currency fluctuations
• government policies and changes related to import / trade restrictions, trading hours, occupational health and safety
• consumer legislation
• international events and the policies of foreign governments

Your competitive business advantage

Ultimately, your business will succeed if it offers clients a competitive advantage. Competitive advantage is reflected in:

• unique service or product
• personalised service
• better quality
• more favourable price
• availability at short notice or longer operating hours
• convenience

To assess your competitive advantage and whether you can attract and retain sufficient clients, take a clean sheet of paper and draw up two lists:

• why clients would deal with my business
• why clients would deal with another business

This assessment will tell you what it is that attracts clients to your business and will help you formulate suitable plans. It also helps focus on what other competitors do well.

Estimate of expenses

Time to estimate your expenses, both fixed overheads and variable. Determine annual estimates as below.

Major expenses

• accounting / administration
• depreciation on equipment and vehicles
• electricity
• insurance
• interest on borrowings
• motor vehicle expenses
• professional advice fees (legal and accounting, etc)
• promotional expenses (advertising / marketing)
• rent, office costs
• stationery
• subcontractors
• technology set-up and updates
• wages
• other costs

Cash flow analysis

Finally, a month-by-month cash flow forecast will let you see the cash flow and balance the consequences of your forecasts. You must be aware of your cash flow needs before you start.

The headings for annual cash flow analysis on a monthly basis:

Feasibility study issues

Don’t be daunted by the detail – planning for success will help you achieve it. Think of the feasibility study as a type of insurance that will help you make the right decision including:

For a new business

• Is there a market demand and need?
• Can a market be created?
• What is the level of competition?
• Is the market static or growing?
• How to finance the business?
• Are there any legal requirements?
• What skills are essential? Are they available or can they be acquired?

For an existing business

• Why is the existing owner selling?
• What is the performance of similar businesses?
• How good is the business location?
• How tough are the competitors?
• How do you get to the real figures?

The study can be planned under the following headings:

• potential revenue
• competitors (present and potential)
• business environment
• your competitive business advantage
• estimate of expenses
• cash flow analysis
• SWOT (strengths, weaknesses, opportunities, threats)

About the author: John Petty FCPA