It’s a fast-growing world; with an increased focus on the ease of business throughout the globe, individuals now are more inclined towards entering into the entrepreneurship arena rather than spending their time on the 9 – 5 jobs. However, before diving deep into any business or carrying on any capital project, one needs to prepare a feasibility study to predict any loss caused by entering into any new business or investing in any capital project. Prospective investors also require a detailed feasibility report before injecting any investment into the business.
What is meant by feasibility studies?
As the name suggests, a feasibility study analyses the project/business to establish whether the potential business idea is feasible. It’s a tool that determines the viability of an idea, such as assessing whether a project is legally, commercially, technically viable, and economically workable. The feasibility study tells us whether a project is worth the investment or may not be worthwhile continuing. There can be many impediments to the project, including too many resource requirements, which not only prevent the resources from performing other tasks but also may cost more than a business would earn back by taking on a project that isn’t profitable.
Why is it important?
As mentioned earlier, a feasibility study is conducted to determine the success of a project or business and minimise its risks. It is implemented or executed only when it becomes clear that the specific project can be carried out profitably. The feasibility study is more than simple project research. It’s more of a framework and a plan to establish and then run the business successfully in the long run.
Some specific benefits that a good feasibility study can drive are:
- Improves focus of the project team
- Identification of new opportunities. In many brains storming sessions, different solutions are put forward for a single problem that was not initially thought of
- Valuable insights on a “yes/no” decision. Yes, then why and no, then why. Do you know the turning point that turned a profitable proposition into a loss or vice versa?
- Identifies other business alternatives. If not this one, then what else can be done
- Identifies the underlying reason for undertaking a project
- Increases the success rate by evaluating varying parameters. The sensitivity of different vital variables can be built in to understand how likely it is to achieve success
- Aids decision-making on the project
- Identifies reasons not to proceed
Steps in a Feasibility Study
A feasibility report or study can be of varied length and complexity, but no matter how long or complex it is, it usually follows the following steps:
- Conduct preliminary analyses. Before taking a deep dive into the full-length study, a preliminary investigation into the markets, economics, customers, and simple demand and supply analysis to understand whether a need exists for the proposed business case.
- A deeper understanding of the market is obtained. This analysis includes conducting a market survey for the demand and price the consumers are willing to pay for the product.
- Prepared the projected profit and loss account and cash flow statement to understand the economics of the business proposition. The preparation of the projected financial statements is the most crucial step. This generally drives the project’s economic viability, which becomes the backbone of the yes or no decision for the project.
- Plan organisational structure for the new project, including staffing requirements, reporting requirements, permanent and contractual break-ups, etc.
- Analyse the points of vulnerability internal to the project and can be controlled or eliminated.
- Prepare a business risk matrix for the project. These business risks should be classified based on their impact and likelihood. A proposed mitigation plan should be prepared and analysed to determine whether the mitigation is sufficient to address the business risk or whether the identified risks are tolerable.
- The final decision of whether to proceed with the proposed project or not.
Types of Feasibility Studies
Based on the functional objective, a feasibility study can be of the following five types:
- Technical Feasibility – This part focuses on the technological resources required. It helps the business determine whether the technical resources meet the capacity requirement and whether the technical team can convert the ideas into working systems.
- Economic Feasibility – This typically involves a cost/benefits analysis of the project, helping companies determine the cost and benefits associated with a project before any financial resources are allocated. It serves as an independent project assessment and enhances project credibility by helping decision-makers determine the economic benefits to the organisation that the proposed project will provide.
- Legal Feasibility – Legal assessment is of prime importance. This assessment investigates the proposed project’s conflicts with the laws and regulations of the company’s jurisdiction.
- Operational Feasibility – This study involves assessing, analysing and determining whether and how well the organisation’s needs can be met by completing the project.
- Scheduling Feasibility – The timing of the project can determine its success or failure. This scheduling assessment estimates how much time the project will take to complete. This helps subsequently as well to monitor the progress of the project.
A feasibility study is necessary to reduce the risk of failure. It not only determines the viability of the project or the proposed business idea but also sets the organisation’s tone for how the company would like to shape itself in the coming years.