How to do a feasibility study from A to Z
Do you have a great idea for a new product or project, but are not sure that there is enough demand in your area to determine that your project is worth your money, time and effort? To determine the feasibility of your idea you need to conduct a feasibility study. What is the concept of feasibility study? And how to do a feasibility study from A to Z?
According to Wikipedia, the feasibility study explains the required investments, the expected return, and the external influences on the project, such as state laws, competition, and technical and artistic development. Which finally enables the investment decision to establish the project, in other words, to accept or reject the project.
Simply put, a feasibility study is a process during which you test the feasibility of an idea: Will it work? Although the specific questions you will have to address will vary depending on the nature of your project or idea, there are some basic steps that apply to all feasibility studies. Read on to learn about the basic steps of the initial feasibility study and how to conduct a detailed feasibility study.
How to do an economic feasibility study for a project
In the case of starting from the idea of a new investment project, the process of preparing an economic feasibility study for the project goes through three basic stages:
* Idea identification
* Initial feasibility study
* Detailed feasibility study
The feasibility study can take place in the following cases:
* Renewal of an existing project.
* Develop an existing project.
* Expansion of an existing project.
* Changing the field of production or activity.
1. Determine the project idea
At this stage, the project begins as an idea, then the elements governing the implementation of this idea are identified. This stage ends with defining the project. Information must be available on:
@ There are no legal, technical, marketing, financial, social or environmental impediments, and that the objectives of the project do not conflict with the objectives of public policies.
@ Ensure that the project falls within the priorities of the concerned sector.
@ Having a general vision and definition of the project, its investment and production volume and its location.
@ Ensure that the project represents the best proposed alternatives from the technical, economic, social and environmental aspects.
@ The project has the ability to continue.
@ Determine the beneficiaries of the project, directly or indirectly.
@ Details related to the project and expected problems are identified appropriately.
@ Monitoring the gap in information and identifying sources to complete it.
How do you find the idea
By observing your environment: unanswered or satisfactory demand, defects in products or services available, tracking developments…
Turning a talent or passion into a business idea
By absorbing and being inspired by a foreign idea
Sources of eliciting a project idea
These sources are many, including:
* Reliance on knowledge capital, knowledge of the market and the economic environment
* Orientation to invention or innovation in the field of specialization
* Retrieving an existing activity
* Approaching well-known brands with great potential
* Unsatisfied demand and needs, and production required to meet these needs
* The existence of unused material and human resources, and there are opportunities or possibilities to use them for productive purposes.
* Lack of marketing facilities for commodities such as transportation, storage, manufacturing or packaging. These points suggest to the investor ideas for projects.
The implementation of your idea lies in summarizing it accurately:
What are the characteristics of the intended product or service?
What is its benefit and purpose? What need or needs are you fulfilling?
2. How to conduct a preliminary feasibility study
Before investing time and money in a detailed feasibility study, you need a preliminary study and a realistic assessment, to determine whether or not there is a need or demand for your idea. If there is a need, you can continue to study the idea in depth and detail. If not, you need a new idea.
We need an initial feasibility study, either for an initial evaluation sufficient to justify the justification for selecting the project and identify opportunities to move forward with a comprehensive study or not, or for the initial selection of one idea among the list of proposed project ideas.
A preliminary feasibility study requires preliminary knowledge of the market in which you will be embarking on your journey and the field to which it is heading.
A preliminary market survey can be conducted through:
Knowledge of the actors in the market: the type of customers (nationality, purchasing power, number…), suppliers (their importance and size…), and competitors (their number, position in the market, etc.)
Evaluate the commercial potential of this project by getting an idea of the market’s ability to absorb your offer, customer response, competitor strength, regulatory constraints, etc.
Product study
Determine the product or service that you want to offer to your customers in the future: offer, use, working conditions, technical specifications…
Market study and target sector
Familiarity with the target market (size, stage of development, geographic distribution, etc.)
Study the request
Knowing potential customers can direct the project towards growth sectors and avoid market risks. This study must include:
* The needs and expectations that must be met in the product / service
* Understanding the behavior of potential customers
* Determine customer segments
Offer study (direct and indirect competitors)
Identifying direct and indirect competitors (presenting a different offer that meets the same need).
The main topics to focus on for each competitor are:
* The product or service offered and complementary products and services
* associated prices
* Site
* Distribution and marketing methods
* trade mark
* Policy alliances with other actors
Market trends study
The market study must be constantly updated, even after the company has launched, in order to anticipate changes in the market. The manager must monitor developments in the market environment in terms of economic, technological, organizational, social and cultural aspects.
3. How to conduct a detailed feasibility study
A detailed feasibility study for any project consists of:
* Market study
* The technical study
* Financial study
A- Market study (marketing feasibility)
A set of methods, foundations and estimates that aim to identify the different aspects of the product / service market that the project is going to produce in order to estimate the current and expected sales volume, and to draw appropriate marketing policies (pricing, promotion, distribution, etc…)
The marketing feasibility study is one of the most important studies that can be conducted on the project, as the decision to continue the technical and engineering study or to stop and search for other alternatives for the project depends on it.
The objectives of the market study are as follows:
* Estimating the size of the expected demand for the project’s * products, its growth rates, the size of the expected market, and the segment (the share of the project).
* Market structure and type, degree of competition, and market divisions.
* Price pattern and trends.
* Identifying marketing opportunities.
* Defining and planning advertising campaigns.
The elements of a marketing study include the following:
* Marketing opportunities for the project: the available demand, the demand that can be developed, the competitive advantages of the project, and the expected sales.
* Supply volume and specifications: current and expected supply, current and expected capacities, new projects, projects under implementation.
* Size of demand and its specifications: domestic demand and its specifications, external demand and its specifications, market shares, primary and secondary markets, the competitive position of the project.
Market analysis according to (SWOT) analysis of strengths, weaknesses, opportunities and risks:
* Project strengths Strength: What distinguishes you from others? (Competition – customs – location – sales points – guarantees – prices – quality – etc.)
* Weakness of the project: What are the expected weaknesses (competition – inventory – prices – locations – customs duties – systems – etc.)
* Opportunity: Opportunities available in the market for a type of good or service?
* Threats: What are the expected risks? Example (seasonal – permanent – systems – etc.)
Market Study Summary:
What are the proposed channels for your products (place and methods of distribution)?
* The product is distributed in each of Riyadh – Jeddah – Dammam (example)
* The product is distributed as follows: through points of sale in the main cities, through distributors, or through electronic sales
Who are the competitors and similar projects?
* Saqr Steel Products Company (example)
* Abdullah Company for Local Sales
* Q company..etc
What are the competitive advantages of your products or services?
* The product has a quality guarantee for a period comparable to similar ones in the market, or there is no guarantee (example)
* The product has different shapes without its counterparts in the market
* the service
b- Technical study
In the light of the marketing study, the parameters of the technical study of the project are determined. What is meant by the technical study is everything related to the establishment of the project, the construction of its sections, the establishment of its machinery, the determination of its needs for production requirements, and the estimation of investment costs and operating costs for the standard year. In general, the technical study of the project deals with the following aspects:
Engineering study for the project:
* Study and analysis of the project site.
* Studying the production process and determining the required areas.
* Determine the project needs of machinery and equipment.
* Determine the project’s needs for raw materials and supplies.
* Estimating the project’s energy needs.
* Estimating project needs for furniture and means of transportation.
* Estimating the project’s direct labor needs, supervisory and administrative needs, and its organizational structure
Estimating project costs:
The project cost study focuses on preparing financial statements that enable the assessment of financial needs. The project cost study includes:
* Estimating the investment costs of the project.
* Estimate operating costs for a standard year.
Any project requires the following technical information to study and analyze the project, including:
* Studying the production process and determining the required areas.
* Determine the project needs of machinery and equipment.
* Determine the project’s needs for raw materials and supplies.
* Estimating the project’s energy needs.
* Estimating project needs for furniture and means of transportation.
* Estimating the project’s direct labor needs, supervisory and administrative needs, and its organizational structure.
Therefore, each element mentioned above will be a focus of measurement to determine project costs.
C- Financial study
The financial feasibility study focuses in its analyzes on the level of the project as an independent unit from the point of view of investors (in the event that a feasibility study is prepared to be presented to the potential investor or financier).
It is concerned with measuring the direct effects of the project without extending to measuring the indirect effects that affect various aspects of economic and social life. The financial feasibility is measured in the form of a numerical analysis based on data, most of which are prepared during the first stage of the study.
Financial Analysis Objectives:
* Measuring the project’s ability – through net cash flows – to recover the investments that it will incur, and within an acceptable recovery period.
* Measuring the profitability of the project and its ability to achieve an acceptable return.
* Measuring the project’s ability to fulfill its obligations to third parties, in particular to external funding sources (banks or individuals).
Stages of the financial feasibility study:
* The first stage: preparing the financial statements
* The second stage: selection of criteria
* The third stage: application of standards and preparation of recommendations
1. The capital cost of the project
Components of investment costs for the project:
First: pre-operating expenses:
* Project studies expenses.
* Registration and licensing expenses.
* Experimental and start-up costs.
* The benefits of the construction period.
* Pre-employment wages.
* Transfer and travel costs before operating.
* Preliminary advertising campaign.
* Temporary constructions.
* Other expenses.
Second: Fixed Assets:
* The cost of land and infrastructure, which is: the price of purchasing the land, improving and leveling the land, and the basic environment that the project may need.
* Buildings and constructions:
Third: Working Capital:
* Liquid cash that is sufficient to meet cash expenses, for example: wages, administrative and marketing expenses, and others, such as electricity and water consumption, maintenance, transportation, transfers, and others.
* Inventory: It is taken into account that a commodity stock is not formed during the first years (construction) because there is no need for unneeded storage, and that the appropriate time for the formation of the commodity stock is the few months after the start of operation.
2. Operating costs
They are the current costs related to production, marketing and management operations, and they represent sacrifices in exchange for obtaining services and benefits that ultimately lead to the generation of revenues for which the project is established. Each production cycle acquires an ongoing character due to its periodicity and repetition, and is represented in three basic items:
operating expenses:
* Raw materials and supplies
* Packing, shipping and transportation costs, fuel
* Administrative and marketing expenses. Wages and insurances. maintenance.
Income and Flow Study:
* income estimates
* cash flow projections
3. The cost-benefit ratio
One of the criteria used as an indicator for the financial evaluation of the performance of production units is the ratio of returns to costs. This indication does not differ from the net present value of investment in its uses in terms of the information it requires to evaluate past performance through records. It looks for indicators to correct financial problems, if any, and to support the positive elements in the project’s practices from a financial point of view. The percentage of return to costs is calculated as follows:
Revenue to costs ratio = total returns over a given period / total costs over the same period
̗
All of this is valued at present value, whether in terms of returns or costs.
A ready-made feasibility study template
You can use a feasibility study template if you can’t make one from scratch. Below is a link to download a ready-made feasibility study.
What after the feasibility study?
After it becomes clear that the idea is suitable for investment, the implementation stage comes. The preparation of an action plan is necessary to enhance the chances of success of the project. Through it, you review all the procedures and means to achieve your goals and launch your business. The importance of the business plan also lies in clarifying the parameters of your project and ensuring its continuity.
