Feasibility Analysis: The cost & Process of Raising capital

Feasibility Analysis refers to the process of examining the viability of a business idea. It means assessment of the potential and practical applicability of business idea. It is not just concerned with product or service but it is study of business viability as a whole. Feasibility analysis helps in identifying possibility, practicality, capacity and achievability of the project.

A prospective entrepreneur having creative and innovative idea must conduct feasibility analysis. It may not only add vitality to the viability of the underlying business proposition but also add vision to the business opportunity.

The following points equips an entrepreneur to decide if he should continue with the existing business idea or not:

• Is this business possible?
• Is this business practicable?
• Probability of success of business in future?
• Do I have access to all the resources required to start the business?

Feasibility analysis helps to critically analyze the business concept in detail. It requires use of both primary as well as secondary data.

Primary data can be collected from potential customers, industry experts etc. while secondary data can be collected through previous studies (if any), published sources, reports and feedback taken by other firms.

Need for Feasibility Analysis

• Feasibility analysis helps in providing guidelines for preparing business plan.
• Through feasibility study, Shortcomings/gaps if any can be detected and measures can be taken to resolve them.
• It helps in understanding the viability of the concept or business idea.
• It boosts up the confidence level of an entrepreneur w.r.t the business idea.
• It reduces the chances of business failure.
• It apprises entrepreneur about the risk involved.
• It Saves an entrepreneur from potential business loss and instills the prospects of success driven by hard work and risk taking capability.
• It also ropes in the confidence of potential investors.

Elements of Feasibility Analysis

Feasibility analysis includes study of various aspects of a business. It includes identifying product viability, technical feasibility and commercial feasibility.

Following are some of the important aspects that should be considered by an entrepreneur while conducting a feasibility analysis:

1. Product/Service Feasibility Analysis – Give Example:

It includes studying various aspects of product/service to be provided to customers. The main aspect to be examined here is testing the desirability and demand for product/service.

In order to test the desirability, one needs to examine following factors:

• What excites consumer about the product. What attributes makes him desire a product? Is it look of the product, is it the fragrance, do users provide importance to size and shape of the product (e.g. soaps).
• What need does the product satisfy?
• Does it fill a gap in market?
• Does it solve customer’s problem?

1. Not only these, it also includes the study of right time to introduce a product? Is there any particular occasion when people buy/try new product e.g. during the time of Diwali, Wedding Season etc. For example, during wedding season there is not only wide range of Indian clothes available in the market but there is also increase in related products like ornaments, footwear’s etc.

So, in order to test desirability and demand for the product, concept testing is done at this stage. Under this, description about product/service is mentioned and shared with potential customers, industry experts to solicit their responses. Their feedback on the same, provides insights about the viability of a product. It provides answers to questions like preferences/dislikes about the product, suggestions that can be incorporated to improve the utility of the product.

Given the volatile nature of the market, these days forecasting the demand for the product is not an easy task. Therefore start-ups can go for “Buying Intention Survey”. It helps entrepreneurs identify/ estimate the demand for a product in the market in future.

An entrepreneur may use questionnaire for this and distribute it among targeted markets. It gives them an indication about intention of customers to buy the product. Any modifications required in the product may be brought to the notice of the entrepreneur at this stage. It improves chances of successfully launching the product in the market.

2. Industry Analysis/Target Market Accessibility (Primary Search, Secondary Search):

Industry refers to groups of firms producing similar or substitute products/services.

An Entrepreneur should conduct feasibility analysis to find, industry attractiveness for the product. Various parameters can be used to study an industry like demographic characteristics of the target group, growth pattern in industry, number of firms competing against each other, profit margins, entry barriers in the industry etc.

Industry is considered attractive enough if profit margins are high, number of competitors are low and firm’s life cycle is in initial stages. This gives lot of scope for the firm to venture in the industry and innovate.

3. Technical Feasibility/Concept Test:

Technical feasibility is study of most appropriate technology to be adopted by business to transform business idea into easily marketable product. Under this, factors like technology to be used, production process involved, type of raw materials needed, ideal size of plant to be installed and equipments required are assessed.

Also factors like manpower requirement, funds needed to support use of latest technologies, cost involved in developing or buyout along with implementation, are judged for success of business.

4. Commercial Feasibility/Business Concept:

Commercial viability is the study of viability of business idea on commercial scale. It is possible to develop environmentally sustainable as well as useful products, yet such products may not be commercially appropriate. Therefore, it is imperative to conduct commercial feasibility test before taking the final decision to commence the production of a product.

A commercial feasibility facilitates an entrepreneur to identify following relevant factors:

• Manufacturing cost of production over short run and long run.
• Anticipating demand for product in near future and in long run.
• Competition level in the market.

Higher cost of production, intense competition level and inefficiency in operations can pose serious threats for firm in long run. One should either be able to fight these challenges to survive or should scrap the project at its planning stage only to avoid wastage of time, resources, manpower and capital.

5. Financial Feasibility:

Assessing financial feasibility of the product involves study of various costs aspects related with carrying of the project.

Under financial feasibility firm identifies following factors:

• Cost of the Project-Fund Required to Start Sustain Initial Losses:

Cost of project primarily includes capital budgeting expenditure on acquisition of capital assets like land and building, plant and machinery, furniture and fixture and other long term revenue yielding assets. It is a long term commitment of substantial amount therefore decisions for investment in these types of assets should be taken carefully. Investments in long term assets are irreversible in nature and expose the firm to substantial risks.

• Working Capital:

Estimation of Working capital requirements should be done with utmost care as both over investments as well as under investments in working capital can hamper routine nature activities to great extent. Having insufficient working capital will lead to liquidity crunch and will stall the business activities while excessive investments in working capital will block the funds that will undermine the profitability.

• Break Even Analysis:

Break-even level is that level of activity at which a firm is able to meet all the variable costs out of its revenue. Identifying the possible sales volumes at which break-even level will be achieved is important for working of business, as it indicates the stage till which firm will continue to make losses. Break-even level will give an idea about resources and time required to reach that particular level of activity,

• Projected Income Statements:

Finance is the backbone of any business. Future sales are projected and revenue charts are prepared to assess the inflow and outflow of funds in the business. Projected income and expenditure statements reflect the magnitude of gap between the income and expenditure so that the difference between the two can be bridged by arranging for funds or deploying excess funds in lucrative avenues.