A feasibility study is an assessment of the practicality of a proposed business. The study is used to support decision making based on a benefit/cost analysis of the actual business or project viability.
Determining feasibility is a subjective process that should be modified to best fit the business situation being assessed. For example, during the deliberation phase of a new project, stakeholders need an abundance of information to make a go/no-go decision before committing to the investment of time and expense needed to create a formal business plan.
At this level of decision making, a pre-feasibility study framework would be appropriate. A generic framework for this study would include market analysis, models of sales assessment, preliminary design, order of magnitude, cashflow projections, and financial ratios.
A good market analysis would define trade-area boundaries and evaluate demography, surrounding development, highway traffic, competition, and market potential.
Models to estimate sales turnover may include capture rate, analogue-based models, and/or discriminate analysis.
Preliminary design would include drawings that describe the structural components and mechanical processes of the facility.
Order of magnitude is a first level cost estimate based on location details, intended use, planned size, parking spaces, amenities, and other factors.
Cashflow projection would provide a detailed breakdown of the money that is expected to move in and out of the business.
Finally, there would be financials such as breakeven point, debt-service coverage, and return on investment.
If the purpose of the feasibility study is to support a loan application, the framework would be quite different.
Here, the study would rely on information contained in the principal’s business plan to validate the overall and segmented viability of the proposed business concept by the core dimensions. This would include market, business model, management, technical, economic and financial, and exit strategy viability.
A viable market is one that is of sufficient size and potential value and sustainable.
A viable business model is one that may be unique or somewhat difficult to duplicate and has the ability to create wealth and value.
Key elements of management viability are skills and knowledge to deliver the business model, manage risk, organize and delegate, recruit and hire, and measure business performance.
Technical viability would demonstrate the project has sufficient capacities, processes, and resources inclusive of materials, labor, and professional expertise.
Key elements of economic and financial viability would include start-up expenses, working capital, operating costs, and financial ratios.
A viable exit strategy is one that can be defined, related to the industry model, identifies potential buyers, and creates wealth.
In the final analysis, the findings of a feasibility study will be assessed by potential investors and stakeholders regarding its creditability and depth of argument.
Consequently, the study report needs to align the findings with the functional processes of the business venture so the audience can easily understand it.
Bob Roman is president of RJR Enterprises — Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at firstname.lastname@example.org