Are you an investor, project manager or entrepreneur and looking forward to knowing the importance of feasibility study analysis?
Also, don’t have any idea about what is the business feasibility study and how important it is for businesses and investors?
In this article, the vital knowledge of the business feasibility study will be delivered. Also, the importance, types, techniques, benefits, and examples of feasibility study analysis will be briefly explained.
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What is a Feasibility Study?
A feasibility study is an analysis that is performed on all the relevant factors of a project or business. It includes the analysis of major functions like economic, financial, legal, technical, and organizational.
Moreover, the entrepreneurs and project managers perform the feasibility analysis to analyze the feasibility, profitability, and practicality of the project or business plan.
Similarly, the investors also use the feasibility to discern the ROI and payback period before making any investment into a project or business startup.
Also, the feasibility studies provide a lot of very crucial information to the company. So, the companies may rethink their decision of entering into a risky business or project plan.
Business Feasibility Study
A business feasibility study is an assessment tool to analyze the opportunities, setting goals, and defining desired outcomes. Also, it helps to delineate the situations and calculate the profitability of choosing business alternatives.
Moreover, it uses multiple analysis techniques to examine the business viability and helps in decision making.
Therefore, a business feasibility study is a vital phase of system development and an important part of the formal business plan. So, the business feasibility study evaluates the operational, legal, economic, and technical aspects of a business.
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Importance of Conducting the Feasibility Study
A feasibility study works like an assessment plan to analyze the practicality of a project or business plan.
So, it asks a lot of questions to make things pretty clear before entering into the business or project:
- Is it feasible to Invest Time and Money into the Project or Business?
- Do we have the required resources to achieve the desired goals?
- Analyze the capabilities in terms of human resources, tools, technology, and other resources.
- What is the return on investment and payback period of the business or project plan?
The business analysts and startup experts have explained a lot of benefits of using the feasibility study technique. Because it helps the project managers or investors to understand all the aspects of a project, business idea, or plan.
Moreover, it provides awareness about the likelihood and impact of potential risks during the execution phase of the plan. Therefore, the project or business team assesses all the relevant factors to determine the viability of the business or project plan.
However, the use of feasibility study analysis is important for the entrepreneurs looking for investments for their startups.
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Types of Feasibility Study
The feasibility study is a credible source of analysis to attract potential investors. Also, it evaluates the business potential for success and all the aspects of a business.
Therefore, the feasibility study examines the six major areas of a business or project plan:
- Technical Feasibility
- Economic Feasibility
- Market Feasibility
- Legal Feasibility
- Operational Feasibility
- Scheduling Feasibility
The technical feasibility helps in the assessment of the capabilities of available technical resources of an organization. So, it helps the organization to analyze if these resources meet the capacity requirements. Also, the abilities of the technical team to realize the business idea.
Moreover, the technical feasibility analyzes the hardware, software, and other technical requirements of the business or project plan.
The economic feasibility analysis focus to evaluate the financial aspects of the proposed plan. Moreover, the cost-benefit analysis helps to determine the viability and profitability of the idea. So, the organization can allocate financial resources.
Moreover, economic feasibility works as an independent assessment tool to enhance project credibility. Therefore, it assists in decision making to achieve the expected economic benefits of the proposed plan.
The marketing team of a business performs market feasibility analysis to analyze the demand and requirement of the business product or service. Also, the business team can conduct a competition analysis to evaluates the proposal viability in the target market.
Moreover, businesses can perform several other analyses to check how much people are willing to pay for the end product or service.
The legal feasibility analysis analyzes the legal aspects of the proposed plan. It verifies the validity of the plan in terms of legal laws. So, no aspect of the business plan should conflict with legal requirements like labor, data protection, social media, and zoning laws.
Moreover, a good understanding of legal laws saves a lot of time and money resources of the project team.
The operational feasibility helps in developing the understanding of meeting organization needs. Moreover, it analyzes if the project satisfies the identified requirements of an organization.
However, the business or project team use requirement analysis to determine the requirements in the system development phase.
The scheduling feasibility analysis is very important to assess the completion time of a project. Also, the success of the project depends on the achievement of goals well on time. Therefore, the project team estimates the time to achieve the different milestones of a project.
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Feasibility Study Analysis Techniques
The feasibility study is an assessment tool to evaluate the viability and practicality of a business idea or project plan. Therefore, it takes all the aspects of an organization and project into consideration.
Moreover, project managers or business experts conduct it before the formal drafting of a business or project plan for investors. So, to comprehensively analyze all the pros and cons of investing in the business idea and to reflect the success factor of a business.
Therefore, the professionals provide the following guidelines to conduct a business feasibility study.
- Perform the analysis to identify the potential factors for detailed assessment.
- Make an income projection of the proposed plan to see the revenue sources of the plan.
- Perform a market assessment to evaluate the product demand and requirements.
- Define the structure, resources and other requirements of the organization.
- Make an opening day balance sheet project to analyze expenditure, revenue and return on investment.
- Review and examine the collected data.
- Use the feasibility results for decision making.
Cost-Benefit Analysis (CBA)
Cost-benefit analysis is a tool used in an economic feasibility study. It helps to find out all the benefits and associated costs involved in the execution of a business or project plan.
Moreover, it includes the evaluation of fixed and variation the operational costs of the business idea to help in decision making. However, the findings of cost-benefit analysis provide a projection of the return on investment (ROI), net present value (NPV), and payback period.
So, the following steps are used to conduct a cost-benefit assessment of a business plan:
- Define the project scope, objectives, and goals.
- Identify potential alternatives.
- Enlist the key stakeholders for each alternative.
- Decide the metrics for the assessment of alternatives.
- Determine the benefits and associated costs of each alternative.
- Make use of common currency for all costs and benefits.
- Determine the discount rate.
- Estimate the net present value
- Perform sensitivity analysis
- Make a go/no-go decision
Return on Investment Analysis (ROI)
As the name reflects, the feasibility study use return on investment analysis tool to measure the profitability of investing money and resources into a business idea.
So, ROI calculates the profitability of the investment in terms of return or gains from an investment.
Moreover, the gain of investment over full investment to calculate the ROI of a business or project plan. Therefore, it’s an important factor of consideration for investors to do investment in a business or project plan.
So, the higher value of ROI means the business will generate more profit on investment. Similarly, if the same amount of money is invested in two different plans. The one with higher ROI will provide more profit as compared to others having less ROI.
Also, the formula to calculate the return on investment of any business or project plan is:
ROI = (Current Value of Investment – Cost of Investment) / Cost of Investment
Moreover, the following points are very important regarding ROI calculation:
- The ROI should be expressed in percentage instead of a ratio for easy understanding.
- The net return is a better term to use for calculation instead of net profit or gain. As the return can be positive or negative.
- It is important to incorporate all the returns and costs for accurate calculation of ROI.
Net Present Value Analysis (NPV)
The net present value analysis evaluates the worth of investment return in the present time. As the value of currency keeps on changing with inflation. Therefore, it is very important to analyze the net present value of the project profit or loss.
In short, the net present value is a difference between the present value of cash outflows and the present value of cash inflows for a certain time length.
The following formula explains the concept of net present value:
Net Present Value = Today’s Value of Expected Cash Flows – Today’s Value of Invested Cash
Moreover, the investors always want to see the net present value analysis in the business feasibility study. Therefore, investors prefer to invest money and resource on plans having a positive net present value.
As the positive net present value is the indication of the more present value of earned profit than anticipated costs.
Feasibility Payback Analysis
The payback period of a business plan is the time to break-even the costs and benefits of an investment. Also, the time required for accrued benefits to overtake accrued and continuous costs.
However, the payback period analysis doesn’t involve the factor of the time value of money. Therefore, it is an important factor to analyze for cash-poor companies and investors. So, the company or investor should know when the investment money will get returned and start making a profit.
The following formula is used for calculating the payback period of a business or project plan:
Payback Period (Years) = Total Initial Investment or Costs / (Annual Benefits – Annual Costs)
Benefits of Conducting Feasibility Study
The importance of a feasibility study is based on organizations understanding to assess all aspects of a project before committing potential resources.
Therefore, the feasibility study provides the following benefits to an organization:
- It helps to identify and evaluate potential opportunities.
- Narrows business alternatives.
- Focus and improve organization requirements.
- It provides information for better decision making.
- It identifies the viability of undertaking the project.
- Multiple assessments enhance the likelihood of plan success.
- Evaluate the reasons and risks to not proceed for committing resources.
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Examples of Business Feasibility Studies
The feasibility study is the requirement of every business, startup or project. The project managers, business heads, and investors make a feasibility study to check the viability of their plans.
Moreover, the feasibility study templates are available for many businesses. These templates for the feasibility study are pre-formatted to help the business teams in the identification of important feasibility studies.
Let’s briefly discuss the use and importance of feasibility study for different businesses.
Hotel Feasibility Study
The hotel feasibility study is made to analyze the sustainability, viability, and profitability of the hotel business plan.
So, factors such as market, costs, benefits, location, and pricing are assessed. Therefore, the higher ROI of hotel remodeling or extension will attract more investors.
The following points are important to conduct the feasibility study of the hotel business:
- Perform a location analysis to answer the FAQs about site attractiveness, associated risks, availability of the human resource, availability of transport, and operational costs.
- Estimate the total costs including development and architectural costs. Such as structure cost, utility bills, tax, materials, licenses, and human resources.
- Perform a market analysis to evaluate the average rent, demand & supply, and competition.
- Estimate revenue and return on investment.
Restaurant Feasibility Study
The restaurant feasibility study is pretty similar to conducting a feasibility study for a hotel business. Also, its focus is to evaluate the viability and profitability of the restaurant business.
Moreover, the location, market, and operational costs parameters are examined to calculate revenue and return on investment. Therefore, investors are interested to invest in the food chain business due to higher ROI rates.
The following points are important for conducting a feasibility study of the restaurant business:
- Identify the potential location for the restaurant.
- Do proper research on the restaurant business.
- Perform market analysis to check the demand, pricing, and competition.
- Make a mock projection of the costs.
- Evaluate the positive ROI to attract investors.
Construction Feasibility Study
The construction feasibility study is conducted for the new construction, extension, or renovation work. It analyzes the feasibility of the project for different factors.
So, the most common factors involved in the assessment of a construction site are planning permissions, site information assessment, environmental impact assessment (EIA), budget, legal or statutory approvals, and potential.
However, any type of site appraisals such as the use of adjoining land, availability of services, restrictive covenants, easement, and assessment of any contamination can also be assessed in a construction feasibility study.
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Feasibility Study in Software Engineering
The use of a feasibility study in software engineering is very common to assess the worth of solving a problem. Although it won’t have any impact on the process of solving the problem.
Therefore, different feasibility studies are conducted during the software development cycle such as:
- Operational Feasibility is conducted to study the usability scope of the software.
- Technical Feasibility is conducted to assess the availability of technology for development. It includes the availability of hardware resources and programming languages.
- Economic Feasibility is conducted to estimate the costs and benefits of developing new software to solve the problem.
Feasibility Study in Entrepreneurship
The use of feasibility study tools is very crucial in any business. Similarly, entrepreneurial startups also mainly focus on the feasibility score to attract investors.
So, the entrepreneurs use a feasibility study to show the potential of their business model to generate more profit in NPV and higher ROIs.
Therefore, the entrepreneurs conduct an extensive feasibility study of their business idea before making a business proposal for funds. Moreover, the key findings of a business model feasibility study are cost-benefit analysis, risk profit analysis, return on investment, payback period, and net present value.
In conclusion, the business feasibility study is a very important tool for project managers, investors, and entrepreneurs. It helps in decision making based on the viability, practicality, and profitability of the business model or the project plan.
Therefore, the feasibility study tool is considered a vital part of the business or project plan to attract investors. So, the deliverables of the feasibility study are cost-benefit analysis, SWOT analysis, risk-profit analysis, ROI, NPV, and payback periods.
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