Introduction to feasibility studies 97

Feasibility Study first term 08/09

prepared by : Mohammad Marwan Al ashi 1

feasibility study...prepared by:mohammad marwan al ashi(s

Section 1: introduction to feasibility study • Learning objectives : 1. Determine the economical meaning of feasibility study.

2. Important of Feasibility Studies.

3. The Components of a Feasibility Study 4. Reasons Given Not to Do a Feasibility Study 5. Reasons to Do a Feasibility Study 6. Pre-Feasibility Study 2

feasibility study...prepared by:mohammad marwan al ashi(s

:Definition of Feasibility Studies • As the name implies, a feasibility study is an analysis of the viability of an idea. The feasibility study focuses on helping answer the essential question of “should we proceed with the proposed project idea?” All activities of the study are directed toward helping answer this question.

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feasibility study...prepared by:mohammad marwan al ashi(s

Definition‌ • Before you begin writing your business plan you need to identify how, where, and to whom you intend to sell a service or product. You also need to assess your competition and figure out how much money you need to start your business and keep it running until it is established. • Feasibility studies address things like where and how the business will operate. They provide indepth details about the business to determine if and how it can succeed, and serve as a valuable tool for developing a winning business plan.

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feasibility study...prepared by:mohammad marwan al ashi(s

Important of Feasibility Studies • List in detail all the things you need to make the business work; • Identify logistical and other business-related problems and solutions; • Develop marketing strategies to convince a bank or investor that your business is worth considering as an investment; and • Serve as a solid foundation for developing your business plan.

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feasibility study...prepared by:mohammad marwan al ashi(s

‌.Importance • Even if you have a great business idea you still have to find a cost-effective way to market and sell your products and services. This is especially important for store-front retail businesses where location could make or break your business.

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feasibility study...prepared by:mohammad marwan al ashi(s

‌.Importance • For example, most commercial space leases place restrictions on businesses that can have a dramatic impact on income. A lease may limit business hours/days, parking spaces, restrict the product or service you can offer, and in some cases, even limit the number of customers a business can receive each day.

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feasibility study...prepared by:mohammad marwan al ashi(s

‌.Importance • If the results show that the project is not a sound business idea, then the project should not be pursued. Although it is difficult to accept a feasibility study that shows these results, it is much better to find this out sooner rather than later, when more time and money would have been invested and lost.

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feasibility study...prepared by:mohammad marwan al ashi(s

The Components of a Feasibility Study • Market Feasibility: • Technical Feasibility: • Financial Feasibility: • Organizational Feasibility: • Conclusions: 9

feasibility study...prepared by:mohammad marwan al ashi(s

Part 1 : The Components of a Feasibility Study

• Market Feasibility: Includes a description of the industry, current market, anticipated future market potential, competition, sales projections, potential buyers, etc.

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feasibility study...prepared by:mohammad marwan al ashi(s

‌Market feasibility • The primary area that the feasibility study needs to address is potential market opportunities for the cooperative. If an adequate level of demand does not exist for the product and the decision maker does not know how to differentiate its product so that it can compete with established industry players, then the proposed venture should not be pursued.

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feasibility study...prepared by:mohammad marwan al ashi(s

…Questions of Market feasibility • What type of industry is the decision maker planning to enter? What are its primary features?

• What are the possible target markets for the decision maker ’s product? What demographic characteristics do they possess? How large are these markets? Where are they located? Is the market expected to grow in the future?

• Will the decision maker be competing in a mature industry or a growth industry?

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feasibility study...prepared by:mohammad marwan al ashi(s

Continue :Questions of Market feasibility …

• Who are the decision maker ’s competitors in this market?

How large are these competitors? How established are they? How do they price their goods? How will these competitors react to the entrance of the decision maker ?

• How will the decision maker differentiate its product from those of its competitors? What are the competitors’ strengths and weaknesses, and how would the decision maker compare against them? How does the decision maker plan on gaining market share?

• What is the projected market share for the decision maker ?

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feasibility study...prepared by:mohammad marwan al ashi(s

…Data of Market feasibility • Data that can help to answer these questions may be found in already-published information or through primary research activities such as market surveys conducted on behalf of the decision maker . Relevant information may be found through various sources such as government statistical publications, trade journals, industry reports, or companies . The Internet has also opened up new routes to obtaining information.

• The answers to market-related questions should help the decision maker develop realistic estimates of the projected demand for the decision maker ’s product for the first several years of operation.

Based on this projected demand, the decision maker can determine its anticipated level of business volume, which is needed in order to design the processing facilities. If the projected business volume is not large enough to justify a processing facility, then the project is not feasible.

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feasibility study...prepared by:mohammad marwan al ashi(s

Part 2 : The Components of a Feasibility Study

• Technical Feasibility: Details how you will deliver a product or service (i.e., materials, labor, transportation, where your business will be located, technology needed, etc.).

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feasibility study...prepared by:mohammad marwan al ashi(s

Importance of technical feasibility • What type of equipment and technology will the business need to produce its product? What are the costs involved?

This includes both the initial purchase and installation costs of the equipment as well as the operational costs of running the equipment.

• Who are the potential suppliers of this equipment? Where are they located? What sort of service and warranties do they provide? How long will it take to acquire the equipment and begin operations?

• Based on its projected business volume, how much raw product will be required by the decision maker ? What are the quality specifications? Will the decision maker have a sufficient membership base that can provide the raw materials?

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feasibility study...prepared by:mohammad marwan al ashi(s

…questions of technical feasibility • What are the possible locations for the decision maker ’s facility? What size of facility is needed? What are the costs of the building? Does the proposed location have adequate access to infrastructures and services such as major highways, railways, and utilities? Will the decision maker build its own facility, or purchase an existing location?

• Where will the facility be located relative to the decision maker ’s customers? Who will be responsible for the transportation of goods between the facility and the market? What are the transportation costs involved?

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feasibility study...prepared by:mohammad marwan al ashi(s

Part 3 :The Components of a Feasibility Study

• Financial Feasibility: Projects how much startup capital is needed, sources of capital, returns on investment, etc.

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feasibility study...prepared by:mohammad marwan al ashi(s

:Questions of financial feasibility • What are the total start-up costs required in order to begin operations? For instance, what are the capital costs of the land, plant and equipment, and other start-up costs such as legal and accounting costs? • What are the operating costs involved? These include the daily costs involved in running the business, such as wages, rent, utilities, and interest payments on outstanding debt. These will determine the cash flow requirements of the decision maker .

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feasibility study...prepared by:mohammad marwan al ashi(s

…Continue : Questions of financial feasibility • Based on the estimated demand, what are the decision maker ’s revenue projections? How will the decision maker determine its pricing arrangements?

• What are the possible sources of financing for the decision maker ? Who are potential lenders?

What will be their required terms and limitations of borrowing?

• Based on the estimated revenues and costs, what is the projected profit(loss) of the decision maker ? What is the break-even point?

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feasibility study...prepared by:mohammad marwan al ashi(s

Part 4 : The Components of a Feasibility Study

• Organizational Feasibility: Defines the legal and corporate structure of the business (may also include professional background information about the founders and what skills they can contribute to the business).

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feasibility study...prepared by:mohammad marwan al ashi(s

Part 5 : The Components of a Feasibility Study

• Conclusions: Discusses how the business can succeed. Be honest in your assessment because investors won’t just look at your conclusions they will also look at the data and will question your conclusions if they are unrealistic.

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feasibility study...prepared by:mohammad marwan al ashi(s

‌Conclusions • The conclusions of the feasibility study should outline in depth the various alternatives examined and the implications and strengths and weaknesses of each. The project leaders need to study the feasibility study and challenge its underlying assumptions. This is the time to be skeptical.

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feasibility study...prepared by:mohammad marwan al ashi(s

…Conclusions • Don’t expect one alternative to “jump off the page” as being the best one. Feasibility studies do not suddenly become positive or negative. As you accumulate information and investigate alternatives, neither a positive nor negative outcome may emerge. The decision of whether to proceed often is not clear cut.

Major stumbling blocks may emerge that negate the project. Sometimes these weaknesses can be overcome. Rarely does the analysis come out overwhelmingly positive. The study will help you assess the tradeoff between the risks and rewards of moving forward with the business project.

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feasibility study...prepared by:mohammad marwan al ashi(s

‌Conclusions • Remember, it is not the purpose of the feasibility study or the role of the consultant to decide whether or not to proceed with a business idea, it is the role of the project leaders.

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feasibility study...prepared by:mohammad marwan al ashi(s

:Summary • Feasibility studies contain comprehensive, detailed information about your business structure, your products and services, the market, logistics of how you will actually deliver a product or service, the resources you need to make the business run efficiently, as well as other information about the business.

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feasibility study...prepared by:mohammad marwan al ashi(s

Reasons Given Not to Do a Feasibility Study • Project leaders may find themselves under pressure to skip the “feasibility analysis” step and go directly to building a business.

Individuals from within and outside of the project may push to skip this step.

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feasibility study...prepared by:mohammad marwan al ashi(s

Continue : Reasons Given Not to Do a Feasibility Study…

• We know it’s feasible. An existing business is already doing it.

• Why do another feasibility study when one was done just a few years ago?

• Feasibility studies are just a way for consultants to make money.

• The feasibility analysis has already been done by the business that is going to sell us the equipment.

• Why not just hire a general manager who can do the study?

• Feasibility studies are a waste of time. We need to buy the building, tie up the site and bid on the equipment.

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feasibility study...prepared by:mohammad marwan al ashi(s

Continue : Reasons Given Not to Do a ‌Feasibility Study • The reasons given above should not dissuade you from conducting a meaningful and accurate feasibility study. Once decisions have been made about proceeding with a proposed business, they are often very difficult to change. You may need to live with these decisions for a long time.

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feasibility study...prepared by:mohammad marwan al ashi(s

Reasons to Do a Feasibility Study • Conducting a feasibility study is a good business practice. If you examine successful businesses, you will find that they did not go into a new business venture without first thoroughly examining all of the issues and assessing the probability of business success.

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feasibility study...prepared by:mohammad marwan al ashi(s

Continue : Reasons to Do a Feasibility Study • • • • • • • • •

Gives focus to the project and outline alternatives Narrows business alternatives Surfaces new opportunities through the investigative process Identifies reasons not to proceed Enhances the probability of success by addressing and mitigating factors early on that could affect the project Provides quality information for decision making Helps to increase investment in the company Provides documentation that the business venture was thoroughly investigated Helps in securing funding from lending institutions and other sources

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feasibility study...prepared by:mohammad marwan al ashi(s

Continue : Reasons to Do a Feasibility Study • The feasibility study is a critical step in the business assessment process. If properly conducted, it may be the best investment you ever made.

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feasibility study...prepared by:mohammad marwan al ashi(s