Feasibility Studies - What Are They?
- [Instructor] Feasibility studies, also called feasibility analyses, are an important step in the entrepreneurial process.
This video will explain what a feasibility study is, how it differs from a business plan, and explain the process for completing one.
In Extension, we are routinely approached by individuals who pose a question along the lines of "I just purchased 20 acres.
What should I do with it?" This situation is a perfect example to demonstrate the purpose and use of a feasibility study.
The new landowner and aspiring small-scale farm or food business owner may have numerous ideas that they are considering.
The options may be something they've always dreamed about doing, something that they've read about, or something that others are telling them would be a good idea.
Without a framework in which to explore the business options, it can be difficult to determine which is sound enough to move forward with.
This is where performing a feasibility study is valuable.
The central question that a feasibility study is intended to answer is this.
Is this a viable idea to proceed with?
That is, will the business idea generate sufficient cashflow and profits, withstand reasonable risk, offer long-term viability, and fulfill business goals.
The process of performing a feasibility study for each potential business venture should lead to a narrowing down of ideas to the one that merits complete development.
So, what is the process for performing a feasibility analysis?
Well, there are three pieces.
A market analysis, a technical or production analysis, and a financial analysis.
Let's take a closer look at each.
The market analysis section looks at and assesses the demand for a product or service, the target market or customer, competition, and market channel and outlets.
When assessing demand, try to determine not only whether demand exists, but also the level of demand.
That is, how much of your product is a customer likely to purchase, along with how often.
What's the target market for your product or service?
Successful marketing depends on accurate targeting of the customers that may want to purchase from you.
Where do these individuals live?
What is their income?
What is their family status?
How do they think about issues, such as small businesses or local products?
Answering these types of questions will allow you to profile the population segment most likely to purchase.
It's important to research your potential competition, as well.
How many competitors are there?
Information to focus on includes trying to understand what they do well, what weaknesses may exist, and how your business and product would differ from theirs.
Finally, assess the potential market outlets for your product and the corresponding channels for getting your product to those outlets.
For instance, do you envision having a retail location on your farm or at your place of business?
Or do you wish to sell your products at farmer's markets, grocery stores, or specialty stores?
Your decision on market outlets could depend on requirements an outlet may have regarding how they receive products.
That is, the distribution channels they utilize.
Will they accept deliveries direct from you or do they require the use of a specific distributor?
Technical analysis looks at facilities, labor and management, and inputs.
What facilities and equipment is required for the production and processing of products?
Where can you obtain these?
Will you be able to service or repair the equipment?
And, if not, how close is a reliable technician?
If your proposed business venture does well, can you handle an expansion or will that require drastic remodeling or new construction?
Reliable and quality labor and management are critical to every business.
Estimate the number of employees you may need.
Not only that.
What knowledge and skills will they need to possess?
Will you be willing to train people?
Do you possess the knowledge and skills to manage this new venture?
How can you handle any weaknesses that exist?
When it comes to inputs, you want to make sure that you have a complete grasp of all the items needed to produce, process, market, and sell your product or service.
This includes everything from water to ingredients to labels.
From where will you source your inputs and will you be able to obtain them on the schedule you need them for?
Are inputs of the quality or have the characteristics that you require?
Finally, the financial analysis looks at startup costs, operating costs, financing, revenue projections, and profitability.
Startup costs are the costs required to acquire any needed land, build facilities, purchase machinery and equipment, obtain licenses, certifications, or any other requirements for starting the venture.
Not only do you need to know how much startup costs will be, but also how they will be financed.
Do you have the cash available?
Or will you be financing through loans or investors?
Operating costs are the ongoing costs, both fixed and variable, associated with running the business and producing the product.
Fixed costs are expenses that don't change based on the amount you produce.
For instance, rent and insurance are fixed costs.
Variable costs are those expenses that do change or vary with your level of production.
Examples of variable costs include raw materials, such as seed or ingredients, electricity, and packaging materials.
You'll want to understand how the operating costs change over time.
For instance, are there months when production increases, thereby increasing variable costs?
How will you finance your potential business venture?
Will you need to take out a loan from a bank?
Do you plan to apply for grants?
Perhaps you know some potential investors.
Research and understand the requirements and implications that come with all sources of funding.
To wrap up the financial analysis, look at the potential revenue that will be generated by the business.
This will be determined by how you price your product and the quantity that you sell.
Finally, estimate the profit that results.
At this point, you may be wondering whether a feasibility study is the same as a business plan.
After all, much of the information we just discussed is contained in a business plan.
However, feasibility study is not a business plan.
Recall the question that a feasibility study is intended to answer.
Is this a profitable idea to proceed with?
The feasibility study is a cursory analysis to determine whether your business idea makes sense and is profitable.
A business plan, on the other hand, is a detailed plan for how you will achieve success with goals, objectives, and other pro forma financial statements, among other information.
A well-conducted feasibility study is the first step to a successful business.
Not only do feasibility studies narrow down the alternatives you may be considering, but it will provide focus to your endeavor by highlighting the opportunities that may exist and weaknesses that need to be addressed through your business plan.