Feasibility Studies

Dr. Amr Abdel-Gawad Mohammed

Ph.D In Accounting and Auditing
Faculty of commerce – Ain Shams Uni.
What is a feasibility study and why do you
need one?
Taking an idea from concept to reality takes many steps.
None more valuable or important than the feasibility study. In
this section you will learn the key concepts to allow you to
formulate the idea and subject it to specific analysis to identify
opportunities and challenges that will make the subject
successful.
A feasibility study should provide a comprehensive analysis and
evaluation of the market, operational, technical, managerial
and financial aspects of your business concept or opportunity.
A comprehensive study can then evolve into the market- driven
strategic plan that is the road map for all subsequent decisions.
A feasibility study provides project committees with an
understanding of the viability of a business concept.
What is the difference between a
feasibility study and a business plan?
A feasibility study is not a business plan. It provides an
assessment of the viability of the business under
consideration. The business plan focuses on what
steps are required to be completed if it is decided to go
ahead with the proposed business launch. The
feasibility study, however, identifies and analyzes
several product or service alternatives and
recommends the best business model.
 The Life Cycle Of Business
The life cycle of a business refers to the key stages
(Startup ,Growth , Maturity and Decline) that occur
over the life of a business. Each stage has its own
unique challenges and opportunities that must be
taken into consideration. The business plan should
describe a specific strategy for how to deal effectively
with each stage.
 The Life Cycle Of A Business
The following provides a description of the four main stages of a business life
cycle:
 . Start Up :
In the start-up phase, the product and demand for it is under development.
Sales are generally low ,and earnings may even be negative .Competition may
affect on earnings during this stage, as other businesses become aware of the
market potential. At this stage, demand for the new product or service must
be created, requiring intensive marketing campaigns and promotions. There
is risk at this stage.
Will consumers accept the product or service being offered at the price
required?
 . Growth Stage :
In the growth stage, there are increasing sales as the business grows into new
markets ,and costs fall due to economies of scale, allowing profitability to
increase. In this stage, marketing risk decreases as consumer acceptance and
consumer brand loyalty increases. The risk in the growth stage is related to
the increase in competition from new entrants.
 The Life Cycle Of A Business
 . Maturity :
In this stage, businesses in the industry are becoming more efficient .
Those who are more efficient earn a competitive advantages over those
who are not. At this stage, however, competition and/or alternative
product promotion can be aggressive. The risk in this stage is that
increased competition may result in slowing growth rates .
 Decline :
In the stage of decline, the market has become saturated, the technology
changes or consumer tastes have moved on. Sales volume declines if
the product or service has not kept up with those changes, or if the
industry has moved on to the next thing. Companies in this position
may sell production assets that are no longer required, move to areas
that offer reduced facility and/or labour costs , withdraw from that
market, or merge with other companies.
 Keys To Business Success
A great business idea is not enough. For a cooperative to turn a great
idea into a real business, there are keys to success :
Management- build an experienced management team with a
broad range of skills, and seek collaborative decision making that
uses all those skills.
Operations Management–create a high-quality product or service,
at a price point where profit can be sustained.
Generate Sales–offer products or services that consumers will
purchase at a price that allow the business to be viable.
Record a Profit–allows for pricing and delivery cost to allow the
business to be profitable , even when the per-unit price decreases.
Service Debt– provide for a way to compensate the capital providers
for the business’s use of the capital. Regardless of the source, the
owners of the capital will want a return on their investment in the
business.
 Keys To Business Success
Provide Residual Income– allow for the business to
generate residual income, which is the amount of profit
that remains once all investment costs have been
removed. These are the funds to be retained in the
business for future growth, or returned to the member
through dividends.
Financial Practices–allows for a perfect financial
planning function and a good understanding of critical
financial measures and indicators. It must also have the
capability to understand what the financial statements
are showing, including important financial ratios.
What does a "Feasibility Study" means ?
 It Is The Study Of An Idea For New Projects.
A new project is something that we do from scratch. If we want to
know something about the future of an idea or a new project, we
conduct what is called a feasibility study to determine the worth of
the idea or project. In short, the feasibility study makes it easy to
take a decision whether to proceed with the idea and execute the
project or simply reject it.
But; Why Is It Important?
Preparing a feasibility study is important for the following reasons:
 It Provides The Scientific and Practical Proof for Choosing Certain
Investment Idea over Another.
 It Provides The Required Support For The Investment Decision.
 It Is A Must To Obtain The Required Approval From Governmental
Authorities, And Banks If Loans Are Required.
Advantages / Disadvantages :
Advantages :
A. It offers a means of determining whether
valuable resources may be committed in a
business .
B. It reduces the potential risk of failure for the
project.
C. It allows for the identification of critical issues
and critical resources in the project .
Advantages / Disadvantages :
Disadvantages:
A. It requires technical knowledge.
B. It requires initial expenses.
C. It requires time and effort.
Uses/Purposes :
The feasibility study as an evaluative tool is used for a
variety of purposes. Some of the uses of a feasibility
study are the following:
To evaluate the profitability of a new businesses
To evaluate the benefits to be gained in the expansion of
a business
To evaluate the financial impact for changes in business
location
To evaluate the benefits from new methods of
production, technology, or machinery .
To evaluate changes in an organization .
To evaluate benefits from business mergers or business
acquisition .
Preparation :
As much as the feasibility study will serve as the basis
for making a decision about the viability/ profitability
of a given business undertaking, then the information
contained in it must have the following characteristics:
Accuracy
Reliability
Timeliness
 Components of a Feasibility Study
There are four basic components that are common
to all feasibility studies, which are:
1- The market feasibility study.
2- The production/technical feasibility study.
3- The organizational/management feasibility
4- The financial feasibility.
 The Project steps
Any new project passes through the following three steps:
Step One: Pre-Investment Phase :
It is the phase where investors discover the new ideas for
investment and prepare the required feasibility studies for
it to be able to choose the most profitable one for his
investment.
Step Two: Investment Phase :
It is the phase where investors take the necessary procedures
and actions to proceed with the construction of the selected
project idea.
Step Three: Operating Phase
It is the phase where project output appears in the markets.
How Do Investors Find Out About Those Ideas?
There are two approaches to search for ideas:
Need Based Approach: where investors look for an
unsatisfied need/s whether because of high cost of
acquisition, or simply not available in the local market.
New Inventions Approach: where investors look for
new inventions and create a need for it.
When selecting the idea for execution we have to
consider two points of view:
1- The investors points of view, and
2- The society point of view.
The objectives of any investor:
From the investor point of view, for an idea to be
worth doing; it has to provide the investor with:
Maximum Profits; that will allow the investment
to Growth; and Continuity
The objectives of the society
In order to judge whether the project is feasible or not
from the society point of view, the idea under
investigation has to achieve most the following
measurements, if not all:
1. Increase National Income, and Personal Income.
2. Provide new jobs (decrease unemployment).
3. Help in controlling Inflation (decrease Prices).
4. Help in controlling exchange rate prices.
5. Raise the welfare of the society.
To achieve these prime objectives, we have to conduct the
following studies:
-First is the preliminary Feasibility Study.
-Second is the Marketing Feasibility Study.
-Third is the Technical and Engineering Feasibility Study.
-Fourth is the National Feasibility Study.
-Fifth is the Financial Feasibility Study.
Preliminary Feasibility Study
Preliminary feasibility study is a phase where investors
explore the potentiality of ideas; find out if there are any
problems, legal or otherwise, that can stop the project; and
study the main features of the surrounding environment that
includes social, economical, and political conditions. The
main outcome of this study is to give the green light for an
idea to be fully examined through detailed feasibility studies.
This study focuses mainly on collecting and analyzing data.
Data used come from two main sources:
Historical Data: this is data that has been published, or
ready made statistics that comes from reliable sources such as
Governmental Authorities, and Academic Research Centers.
Field Data: this is data that is collected from the
surrounding environment through survey, and sales
representatives.
 constraints that face preliminary
feasibility study
There are three main constraints that face preliminary feasibility study. These
problems are:
1) Information:
As mentioned before, preliminary study depends mainly on data. It is not always
easy to get the required data, and if you can obtain the data you have to make sure
of its reliability.
2) Cost:
Preparing a feasibility study usually requires the need of many experts, and
sometimes it is necessary to carry on some experiments. This increases the total
cost of the study. Nevertheless, we can not say that we are not going to conduct
the study but we have to capitalize its cost to be amortized over a long period
(usually 3 to 5 years).
3) Time:
The third constraint is the time; feasibility study takes time to be finished. If the
data and information used is old, or if the study was made long time ago, the
outcome will not be accurate or reliable to take the correct decision.
Note:
The main outcome of this study is to give the green
light for an idea to be fully examined through
detailed feasibility studies in addition to provide
the required and sufficient information needed.
This output is the input for the first detailed study
that is Marketing Feasibility Study.