Chapter III

Feasibility Planning

Dr. Gopalakrishna BV Associate Professor AJIM, Mangalore

Concepts of Feasibility Planning Fundamental of a good feasibility plan Components of feasibility plan Stages of growth model

 The success of an enterprise depends upon the entrepreneur doing the right thing at the right time. Starting a new enterprise is a very challenging and rewarding task. An entrepreneur has to take numerous decision, right from the conception of a business idea, up to the start of production. Hence, the identification of the project to be undertaken, requires an analysis of the project in depth. Therefore, feasibility plan of the project has to be conducted before preparing a feasibility report of the project.

 Feasibility study is done to find whether the proposed project would be feasible or not. It is important to demarcate environmental appraisal and feasibility study at this point. Environmental appraisal is carried out to assess the external and internal environment of the geographical areas, where, entrepreneur intends to set up his business enterprise. Hence, though feasibility study would be dependent on environmental appraisal yet it is far more descriptive

What is Feasibility Planning Feasibility plan contain comprehensive, detailed information about new business venture or enterprise about business structure, products and services, markets etc. It is also known as moderating the concept of a comprehensive business plan. A feasibility plan encompasses the full range of business planning activities. It is identify the essential information needed by investors and financial institution to make decisions about financing or loans.

What is necessary for Feasibility Study?

Provide a thorough examination of all issues and assessment of probability of business success Give focus to the project and outline alternatives Surface new opportunities through the investigative process Enhance the probability of success by addressing and mitigating factors early on that could affect the project Provide quality information for decision making Help to increase investment in the company Provide documentation that the business venture was thoroughly investigated Help in securing funding from lending institutions and other monetary sources

Developing a Good Plan Feasibility plans usually are written for investors and lenders and being aware of them clear, comprehensive and easy to understand. Writing an honest plan with well-supported information will benefit everyone. A well written plan should be clearly identifying products, services, markets and the founders. The plan should be easy to read, complete, and accurate. There should be no misspellings, improper grammar or mistakes in data. Entrepreneurs who know how to write a good plan.

 Feasibility study can be defined as a process for identifying problems and opportunities, determining objectives, describing situations, assessing the range of costs and benefits, associated with several alternatives for solving problems. Feasibility study is used to support the decisionmaking process cost-benefit analysis of business viability. It includes technical, market, financial, organisational and competitive feasibility. The Chart presents a breakdown of the factors involved in a comprehensive feasibility of a new venture.

Technical Feasibility
Marketing Feasibility Financial Feasibility Organisational Feasibility Competitive Feasibility Key areas for assessing the Feasibility of a New Venture
Determination of Feasibility of Planned New Venture

New Venture Idea

Components of Feasibility Plan 1. Marketing Feasibility 2. Technical Feasibility 3. Financial Feasibility 4. Organisational Feasibility 5. Competitive Feasibility 6. Social Feasibility - social point of views

1. Technical Feasibility technical requirements for producing a product or service

1. Location of the project rural, urban or semi-urban. 2. Construction of factory, building building and its size. 3. Availability of raw materials sources of supply, alternate sources, its quality and specifications cost etc. 4. Selection of Machinery capacity, cost, sources of supply, technology evaluation of machine. 5. Utilities availability of utilities like water, gas, electricity, petrol, diesel etc 6. Staff requirement requirement of workers, technical staff and officers etc. 7. Technical viability - opportunity

2. Market Feasibility good market Market feasibility is concerned with two aspects aggregate demand and market share. For this market analysis requires variety of information and appropriate forecasting methods. Nature of the market in terms of monopolistic or perfect competition is to be studied. Cost of Production study and control of production, selling cost. Selling price and profit selling price determines profits. Demand present demand and demand forecast Market share comparison with market share Target Market whom targeted

 In addition, a wide variety of information would be required to be collected as given below. 1. Consumption trends in the past, present consumption levels and consumption trends for the future. 2. General performance of the Industry to which the product belongs. 3. Past and present supply position. 4. Production possibilities and its constraints. 5. Structure of competition national and international 6. Demand elasticity 7. Consumer behaviour with respect to preferences, attitudes, brand loyalty, religious beliefs, advertisements etc.

3. Financial Feasibility financial feasibility is the most important aspect of a business opportunity. 1. Total capital cost of project fixed capital, working capital and interest factor. 2. Sources of capital main sources of capital interest burden studied in detail. Subsidiary sources of additional finance 3. Break Even Analysis (BEA) 4. Estimation of cash and fund flow 5. Return on invest (ROI) amount of return on investment for the investors/share holders. 6. Proposed balance sheet liabilities and assets, depreciation, interest burden, profits expected etc. 7. Cost of labour and technology employees salaries and R and D expenditures.

5. Competitive Feasibility Existing competitiveness size, financial resources market environment potential reaction of competitive advertisement and sales promotion potential of new competitors.

6. Social Feasibility It is not enough if a project is feasibility from marketing, technical and financial point of views. A project should also be acceptable from the social point of view. The social benefits and costs which can be different from monetary benefits and costs. A social feasibility study is carried out and tries to answer the following questions.

1. What natural resources of the country is the project draining 2. What is the impact of the project on the environmental ways. 3. What is the community reactions about to a particular project. 4. Does the project displace people? If so who/ How Many? What is the 5. What is the cost involved in restoring damages done to the environment 6. What would be the contribution of the project towards achieving local employment, selfsufficiency and social order.

Feasibility Report Feasibility report contain comprehensive, detailed information about new business venture or enterprise about business structure, products and services, markets etc. It is also known as moderating the concept of a comprehensive business plan. A feasibility plan encompasses the full range of business planning activities. It guides the entrepreneur in actually starting up and running the business venture.

 Feasibility report used to support the decisionmaking process cost-benefit analysis of business viability. It includes technical, market, financial, organisational and competitive feasibility. The feasibility report should be prepared by the entrepreneur, he or she may consult with many other sources in its preparation. Lawyers, accountants, marketing consultants and engineers are useful in the preparation of the plan. A Feasibility report includes generation of idea into a successful venture - research internal and external opportunities, threats, strength and weakness of the new venture.

1. 2. 3. 4. 5. 6. 7. 8. 9.

Contents of a Feasibility Report Objective and scope of a feasibility report Product characteristics specifications, uses and application, standards, quality etc. Market position and trends anticipated demand, market information, price structure Raw-materials requirement prices, sources properties of raw-materials Manufacturing processes selection of process, production schedule and techniques. Plant and machinery - tools and equipments Requirement of land area, building, construction schedule Marketing channels trading strategies and marketing strategies Requirement of personnel labour and expenses of wage payment.

EIGHT COMMON ELEMENTS IN A FEASIBILITY PLAN Executive summary Business concept Product or service Market research and analysis Market Plan Manufacturing Entrepreneurial team Financial documentation Venture defined, products or services identified, market characteristics summarized, financial structure profiled Purpose of the venture, major objectives of its founders, description of the firm. Function and nature of products and services, proprietary interests, attributes and technical profile. Customers, markets, industrial structure, expected competition and sales forecasting Market strategy, pricing, promotion, distribution, warranties and sales leadership Facilities, location, inventory and materials, human resources, technology, security, insurance, safety Profile of founders, key personnel, investors, and management roles Financial statements, assets and liabilities, break-even analysis

Feasibility Analysis: Key Questions

 There are eight elements in a feasibility plan. They are 1. Executive Summary 2. Business Concept 3. Product or Service 4. Market Research and analysis 5. Market Plan 6. Manufacturing or operation 7. Entrepreneurial team 8. Financial documentation

1. Executive Summary It is a synopsis of the proposed enterprise that is intended to attract interest of all concerned. This includes The executive summary is a summary of all key sections of the feasibility study 1. Definition of the business venture nature and purposes of the new venture. 2. Product or service what will be sold development of product/service 3. Market characteristics nature of the market, cost of production, selling price, market share, target market. 4. Entrepreneurial team founder and other personnel. 5. Financial summary start-up estimates, cash-flow requirement BEP.

2. Business description This section is a thorough description of the business Comprehensive information about business This will give details about the business concept. It will discuss the objective of the business A brief history about the past performance of the company Form of ownership sole proprietor, partnership, co-operative society or company. It would also label the address of the proposed headquarters.

3. Products or services Every plan is to explain the product or service concept. The plan must provide an accurate description of product or service before marketed. Describe the product or service in simple language product mix. Describe how customers would use and buy the product. Describe key components or raw-materials Describe plans to test the product durability, quality etc.

4. Market research and analysis The objective of market research and analysis is to establish a fact as the existence of the proposed venture. Entrepreneurs must provide a credible summary of potential customers, markets, competitors, pricing, promotion and distribution. Potential customers demographic information age, sex, family income, occupation etc. Market demands, market trends and opportunities for the new business. Competition direct and indirect competition, competitors SWOT Analysis. Pricing system normal prices, pricing policies, methods of discounting credit policies, price strategies.

 Methods of distribution marketing, pricing systemic, promotional efforts. Sales forecasting 5. Market Plan It is based on market research how the venture will succeed. Prices, promotion, distributional channels, service and warranty conditions, marketing leadership. 6. Operation plan Physical facilities Inventory management Human Resource requirements Operational rationale Legal and insurance issues.

7. Entrepreneurial team Entrepreneur must take care to profile the entrepreneurial team honestly but effectively. They should emphasize positive and negative characteristics of team members. 8. Financial documentation Money is the objective standard of measurement to assess the progress of the firm. What are your Start-up capital requirement What are your requirement for Working capital Fixed and variable cost requirement Financial statements of new venture are projected based on previous project. Analysis of break-even point and cash flow budgets.

Stages of Growth Model A business venture starts growing after it is set up venture gets started on its own. It needs planning and setting up The venture if planned properly will easily manage the start up stage and survive and glide into the growth stage, prosper and expand. If the going gets rough and the entrepreneur finds it tough the venture can lose ground and slip into maturity and then decline. All ventures do not pass through all the stages in a given sequence.

 No time limit can be assigned as to how long a firm would stay in each of these stages. A venture that has moved into the maturity stage or the decline stage can make a come back into the growth stage again and begin to expand and prosper. In theory the firm progresses through certain stages during the course of its life cycle The pre-start up, Start up stage, Prosperity stage, Expansion stage, Shake out stage, Maturity stage and Decline stage

Demand and Output O

Growth & Prosperity

Pre Start up Stage

Expansion
Time Period

Shake Out

Maturity

Decline

The Growth cycle of A New Venture The five stages of growth model consists of categories of distinct activities essential for a new venture generation of idea to starting and running a business enterprises. The four stages are 1. I state Pre-start-up stage 2. II stage Start up stage 3. III stage Early growth stage 4. IV stage Later growth stage 5. V Stage Decline stage

The Life Cycle of the Company

Pre-start up stage

Start up stage

Early Growth Stage

Later Growth Stage

Plan the Venture Preliminary work Obtaining resources Organising

Early growth stage Major changes in Markets, finances and resources utilisation

Evolution of a venture into large Initial period of business company Starting new business venture Necessary adjustment to survival Facing competitions with others Professional management

Pre-start up stage Concept feasibility Business Plan Resource Acquisition Planning the venture Preliminary work
Growth stage Cash flow Staffing Financial System Major changes in markets, finances and resources utilisation

Start up stage Customer acquisition Cash flow Infrastructure Necessary adjustment

Maturity stage Innovating Customer retention Professional management Managing resources Decline Demand declines Substitute availability Decline sales and profits Wasteful expenditure Sick units emerging

1. Pre-startup stage This stage is also called the foundation or initial stage and gives a sense of direction to the entire venture. The product idea, the feasibility study, product development all constitute a significant part of the pre-startup stage. This stage also extend into capital mobilising, construction of building activities, installation of the machinery. In this stage entrepreneurs faces many problems and challenges new business venture.

 Entrepreneurs will begin by asking questions about the actual potential of their products/services Production, operations, markets, competitors, costs, financing and potential profits etc. There are four activities common to all new business venture, these are business concept identification, product-market study, financial planning and pre-startup implementation.

Business concept defined

What is the purpose of the new Venture What does entrepreneurs Want to accomplish with business

Product-market study

Product research feasibility study Market research

Financial Planning

Financial Projection cash needed, Income Generation, expected Expenses Investment and borrowing
Getting ready to start

Pre-start-up Implementation

2. The start-up stage In this stage record keeping and accounting is very crucial during this stage decision making. The entrepreneurs aims at maximum profit in a short period of time. Product-market study Once an entrepreneurs has determined that a product or service is feasibility and next activities is involves pragmatic research. Product research actual R and D to design the item, investigate development costs evaluate material and explore methods of manufacture.

Market research 1. Who will buy the product or service? 2. What will they will be willing to pay? 3. How can I attract them to my business 4. If this venture is a big success what will prevent competitors. 5. Can I establish a niche in the market? 6. What are my options for long-term growth? Financial Planning money Pre-start up implementation

 The start-up stage is the initial period of business. For companies with products or services to sell, it is the first foray into revenue generating activities. The start-up stage has no definite time frame and these are no models to describe in this stage.
This stage constituting two types of objectives 1. Start-up operating objectives 2. Meeting operating objectives

Sales

To attain monthly sales volume as projected at prices To achieve projected sales of mix of products Sales volume and price projected Incremental growth within seasonal patterns Long term positions

Revenue Growth Position

3. Early Growth Stage (Growth stage) Once the venture is positioned, successful enterprises will experience a stage of early growth. This is a period of intense monitoring, and growth can occur at different rates along a long continuum slow growth through higher growth.
Very slow Comfort zone Very rapid

 The real growth of the company undertaken during this stage. The enterprise grows rapidly and the one man show is giving way to delegation. In this stage the entrepreneur should groom others, share the responsibility and decision making authority. The enterprise widens its product line, develops new products, and enters new market segments. The revenue earnings exceed the expenditure and the income earnings grow substantially. Various R and D activities carried by entrepreneurs during this stage.

 One of the danger faces by firm during the growth stage is financial crises when the right and low cost funding is not chosen for expansion. High cost funds can cause and interest burden. 4. Later growth stage (Maturity Stage) Volume of sales goes on rising but at decreasing rate. This is the stage where maximum expansion and sales undertaking no more inclined to grow further.

 It has touched every corner of the market both domestic and international market. The profits do not keep pace with the rise in sales. There is more expenditure incurred in advertising and sales promotions. The enterprise shuts down its fringe operations and non-profit making and less profit making business activities and branches.

5. Decline Stage From maturity, an enterprise can slip into the decline stage when the management does not come up with the required effort to save the company. In the decline stage, the firms products are not in much demand. There are better and cheaper substitutes that are available in the market. The sales decline rapidly and profits nose dive. Inventory level of finished goods goes up. In such a situation, the enterprise has to completely change its product line and begin manufacturing new products that are in demand.

 It should diversify its product line and exercise rigid measures, to cut down unproductive and wasteful expenditure. In the decline stage that sickness of the enterprise becomes evident. It finds it difficult to meet its fixed and variable costs. The working capital advances from the banks are diverted to pay off the creditors and there is no money to buy raw material. Advertising expenditure becomes unaffordable. Slowly and steadily skilled and trained employees leave and getting their replacement becomes difficult. Shut down or sell out of enterprises.