Do you know how to conduct feasibility study on a business idea? What if I provide you with a feasibility study template and sample? If I show you a practical feasibility study outline, will you appreciate it? If your answer is yes, then read on.
In the previous article wrote, I stressed the importance of conducting feasibility study on your business idea before taking it to the marketplace. Today, I will be teaching you how to conduct feasibility study on your business idea. Since conducting feasibility study is such an important process that must be carried out on your business idea or proposal, I will advise you print out or bookmark this article for future reference.
“A man that is prepared has half won the battle.” – Sydney M. Bremer
5 Reasons Why You Must Conduct Feasibility Study
What is the importance of conducting feasibility study before starting a business? Can conducting feasibility study give your business an advantage and help reduce the high rate of business failure?
A feasibility report is an often ignored but vital prerequisite to building a successful business from scratch. In fact, not doing feasibility is one of the silly mistakes entrepreneurs make when starting a business. So in this article, i will be stressing the need to conduct feasibility study.
“Starting a business is like jumping out of an airplane without a parachute. In mid air the entrepreneur begins building a parachute and hope it opens before hitting the ground.” – Rich Dad.
Few years ago, before starting a business of my own, I was privileged to assist my dad in overseeing the affairs of his business. Our company was in the business of importing and distributing sanitary wares.
Business moved on smoothly for many years till we began to experience a decline in sales and decrease in profit margin due to stiff competition and inconsistent government policies. My dad decided to diversify so he made a move into the clothing line based on the recommendation of a nephew.
Since he started his first business from scratch without conducting a feasibility study, he thought he could repeat the feat in the clothing line. As expected, the business flopped in less than two years due to many unforeseen factors I wouldn’t want to mention here; and we lost a lot of money.
Though this experience was painful, I learned a lesson I will never forget in my life and that is: “The Importance of Conducting a Feasibility Study before Starting a Business.” Now i know many out there have made this same business mistake and many are still to bound to make it. Having shared my story; let me highlight five reasons why you need to conduct feasibility study before starting a business.
Importance of Conducting Feasibility Study Before Starting a business
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. It is worthwhile to know that many entrepreneurs have abandoned solid business ideas because the profitability could not be ascertained on conducting a feasibility study on the business idea.
b. A feasibility study report 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.
c. Feasibility study will help you identify the flaws, business challenges, strengths, weaknesses, opportunities, threats and unforeseen circumstances that might affect the success and sustainability of the business venture. Just like the case of my dad’s business, the business failure and loss of money would have been avoided if we had carried out a feasibility study. We simply jumped in based on someone’s recommendations because we were flushed with cash and we paid dearly for it.
d. Before starting a business, feasibility study will enable you estimate the financial, human and technological resources that will be needed to ensure the successful launching of the business. Feasibility study helps to reveal the number and level of skill or unskilled workers to be employed and their salary scale.
e. Feasibility study will help you to determine 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.
As a last note, my advice to you is this:
“Never invest a dime without first carrying out feasibility study on the business idea.”
How to Conduct Feasibility Study – Sample Template
A Typical Feasibility Study Template and Outline
1. Economic Analysis
Running a business requires deliberate actions and plans to make the business succeed and part of what you need to do as an entrepreneur if you want to build a business with a solid foundation is to ensure that you conduct economic analysis for your business from time to time.
I believe this is where your feasibility study should start from. What is the essence of carrying out market research or even going ahead to start a business when the economy of your country or state does not favor entrepreneurship or private ventures?
Simply put, economic analysis is a strategy employed by business owners to effectively and optimally allocate and make use of the scarce resources available to them in their business. An effective economic analysis will ensure that you start your business on a positive footing because it will help you maximize the resources within your disposal with little or no stress. For instance, if a proper economic analysis is done before you start executing your business plan, you will realize that you will only spend more time and resources on the most important factors that has the potential to either make or mar your business.
Analyzing the economy will help you align your planned business with the economic situation on ground. Economic feasibility should include analysis on:
- Government’s fiscal and monetary policies
- Opportunity cost of resources
- Social cost
- Import and export rate
- Inflation rate
- Tax rate, levies and duties
- Currency exchange rate, etc.
Once you are able to go through the process, the next thing to do is to sit back and review the document generated from your economic analysis. As a matter of fact, you can liaise with someone or perhaps a practicing economist to help you with the review of the document; it might attract a fee though. The truth is that you would notice the professional touch once an economist helps you review your economic analysis document.
Conducting a thorough economic analysis before starting a business will enable you start and run the business with little or no pressure because you would have succeeded in taking care of all the areas that you are likely going to get pressure from.
The next thing you should be analyzing is the market for your proposed business idea. Carrying out a feasibility study on the market will enable you know if there is actually a need or market for your business idea. Market analysis will also help you to determine the size of the market, demographics and psychographics of the market, level of competition and the size of the market you can compete for.
3. Technical Analysis
There are certain aspects of setting up a business that an entrepreneur need not neglect and technical analysis is one of them. Technical analysis is all about collecting and studying all the needed techniques that will help you effectively run your business. In some quarters, especially the financial industry (stock market), technical analysis is about the collection of price trends with the aim of forecasting or predicting the future price trend of stocks, commodities, and futures et al.
Although technical analysis is majorly used in the stock market, but you can apply same principle to your startup. The essence of conducting technical analysis for your startup is to ensure that you are well equipped with the right resources to successfully launch your business. Technical analysis is almost similar to economic analysis because it also involves the law of demand and supply – market fluctuation et al.
Now let us quickly consider some of the key steps you need to follow to be able to effectively conduct technical analysis for your startup business;
- Study and Research-: If you want to successfully conduct an effective technical analysis for your startup business, then you must spend time to study and research your line of business. This part of a feasibility study deals with the technological requirements of the business. Technical analysis will enable you determine the method of production to be employed, equipments, spare parts and tools, site development, supporting facilities, the nature of the factory building, fencing and so on.
- Constantly Review Your Technical Analysis Document-: Once you are able to successfully follow all the steps discussed above, then you would have succeeded in conducting a technical analysis for your startup. What is expected of you to do with your technical analysis document is to constantly review it so that you won’t be operating your business with obsolete techniques and equipments. So ensure that you read journals and any available material that relates to your line of business. It will help you to stay abreast with the changing trends and technology in your industry.
No doubt if you are able to conduct technical analysis before launching your business, you would have succeeded in putting in place machineries and structures that will guarantee you huge success with your startup business.
This is carried out with a view to determine the best location for the business in terms of nearness to high traffic roads, nearness to infrastructure, accessibility to customers, ease of transportation of raw materials and finished products, nearness to cheap labour, cost of land acquisition and so on.
This part of a feasibility study deals with the process of estimating the level of skill, professionalism and number of employees to be hired by the business. The salary scale, incentives and pay package are also estimated at this point. In studying and researching your line of business, you are expected to get a good idea of the technical skills required to successfully run the business and how you can source for such skills.
For example; if you intend starting an automobile repair and maintenance workshop, part of the technical skills you would need to be able to run a complete auto workshop are auto mechanical skills, auto electrical skills, panel beating skills and also marketing skills amongst others. Your business plan should be able to point your areas of strength and weakness thereby affording you the opportunity to make provision to either acquire the technical skills required or upgrade your existing technical skills.
- Map out Strategy on How to Source for the Required Technique-: The next thing to do once you are able to list the techniques needed to run your business is to sit down and map out strategies on how to source for the required technique. As a matter of fact, sourcing for some of the technique needed to run your business might involve hiring an expatriate to help you fill in the skill gap if you can’t find a qualified person to fill in the role in your country. That is why it is important to conduct technical analysis before launching your business so that you will be well informed and prepared financially to shoulder the expenses that come with hiring expatriates or consultants. There are other means you can follow to source for people with the technical skills that is required in your business; you can poach from your competitors, and you can as well hire fresh graduates and train them to fit into your plans.
- List the Techniques that will be needed in effectively running Your Type of Business-: If you successfully carry out a thorough research and feasibility studies, you will be able to pin point the required skills needed to successfully run the kind of business, and how to source for the skills. So, what is expected of you to do is to list all the techniques that will be needed and then conduct a proper analysis to know the role and capacity each of the technique will play in your business. The truth is that there are key techniques that you can’t ignore from the day one of starting your business and there are some other techniques that can be adopted as you grow the business
- Develop Suitable Training Program-: The essence of conducting technical analysis before starting your business is to ensure that you put in place all the techniques that are required to effectively run your business. So, part of what you need to do is to develop suitable training program that will help you equip your staff with the required technique needed to run your business and also to help them operate effectively. The truth is that if you want to run a business that has the capacity to compete globally, then you must ensure that you adopt best practices.
Part of what you need to do when you want to conduct financial analysis for your business is to draw up a comprehensive budget for your business. Your budget should capture your expenses and your income and also financial flow strategy. The truth is that the bulk of the job to be done when conducting your economic analysis for your business will be done here – budgeting. So you must endeavor to give it the professionalism that is required to make it fly.
Although when conducting financial analysis for business it involves working with forecast and projections, but at the same time it is important that you know your financial capacity. The bottom line is that economic analysis revolves around managing the scarce resources within your disposal and finance is the chief of the resources.
Financial analysis will be dealing with the estimation of the total capital involved, capital expenditures, working capital; profit and loss analysis, pricing of products, cash flow projections, projected sales revenue and the entire project viability. Everything concerning finance should be dealt with at this juncture. If you are trying to raise venture capital for your small business startup, then you have to do a clean job on the financial section of the feasibility report because this is where investors focus on. All they are interested in knowing is how much is the percentage return on investment and the payback period.
This is the last part of a feasibility study and probably the most important. After all other factors have been analyzed and proven viable, sensitivity and risk analysis can come in. Building a business without properly conducting a risk analysis is like flying a plane without regards to weather condition. Before any business idea is taken to the marketplace, its risk to reward ratio should be analyzed, the sensitivity to competition should be determined and the liquidation rate of companies in the industry of your proposed business venture should be calculated. With results obtained from sensitivity and risk analysis, growth and survival strategies can be developed for your proposed business.
As a final note, if conducting feasibility study is too technical for you; then consider hiring a professional or a business consultant to do the dirty work for you. It’s going to save you time and energy. And just before I drop my pen, always bear in mind that carrying out feasibility study on your business idea will enable you write a business plan and help you forge a competitive advantage for your business and increase your chance of success.