Feasibility Assessment

How detailed should a feasibility assessment be?

The level of detail and research needed to assess the business idea will depend on the risks, and the expected costs that would be incurred in case of failure. This has to be weighed against the possibility of losing the advantages a new idea offers and the costs of delay. Truly innovative ideas can be time-critical. On the other hand, putting a new product or service into a market that views them as a substitute to existing offerings will benefit from closer examination of the costs and likely customer response.

There are no firm guidelines on detail – it depends on the complexity of the idea and the number and characteristics of the people you are trying to convince.

Elements of a feasibility assessment

As a first step, a feasibility assessment should define the business idea, be it a new project, product or service. The project or business idea feasibility can then be determined. The feasibility needs to account for the current circumstances of the proponent. For example for a business intender it should take into account personal readiness, skills, resources, knowledge and goals. For established businesses, linkages to existing lines of business, customers, suppliers, employees and other stakeholders need to be accounted for.

A feasibility report should have the following structure:

• Executive summary provides a quick overview of the main points of the assessment, helping to form a picture of the proposal along with the recommendations. It should be concise and include the major findings covered in the main body of the report.
• Background information provides a context to the business proposition. It links the business idea to the current circumstances and helps to inform evaluation of the business idea.
• Description of the business idea, including any changes needed to be made to existing processes or the need to add items to existing range of products and services.
• Advantages and disadvantages of the business idea compared to alternatives, such as competing products; or for a new concept, its relevance to current practices, and to unmet or potential demand.
• Market for the product offerings. State the number of customers, expected frequency and size of average purchase, and any reduction in costs across the business arising from the new product or service. Any assumptions about customer purchase behaviour should be identified so that they can be evaluated in terms of likelihood of being achieved or exceeded. For changes in business operations, the payoff may come from competitive advantages such as increased market share, cost savings or higher prices. Research should focus on:
• Customers: You need to be clear about the type of customer you will target, and why they will respond to your offering.
  Identify your target market segments or groups: What knowledge do you have of your market segments or groups? How many are there? What will they buy? How often will they buy? What will be their average purchase?
• Products & Services: Create a list showing the products/services you will be offering to each segment; how much will customers pay for each product or service.
• Competition: List your competitors and note their perceived strengths and weaknesses. You need to understand why they are competition to your proposed business.
• Ask the question: How can you attract customers from them? Price should not be the only answer; whole of life value, product features, distribution and promotion strategies, and after sales options may all be part of the purchase decision.
• Map: Obtain a map and define on it your market boundaries, your location, access routes, your competitors, your suppliers, and demographic information on your market such as population and distribution.
• Costing for the implementation of the business idea: assess how long it will take you or your staff to produce or obtain the proposed products or services and to deliver them to your customers and work out the cost of that time. Determine how much it will cost to buy, assemble or produce them.
  This approach should account for all costs over and above the existing activity. For existing businesses this section should clearly specify if marginal or average costs have been used to determine costing. Assumptions should be stated, for example assumed raw material prices, availability of supplies, staff skills, plant and equipment etc. Costs of alternative production/implementation strategies should also be considered in the analysis.
• Suppliers: Identify preferred and alternative suppliers; collect their catalogues and price lists.
• Location: Identify your site, is it rented, owned or at home? Do you need more room than existing business? Why locate there? What are the advantages and disadvantages?
• Resources: such as assets and equipment that will be required, cost of acquiring them, alternative methods of acquisition, for example outright purchase versus hire-purchase or other forms of leasing.
• Staff: What staff will you need? What skills will they need? What will you need to pay them?
• Financial analysis: Work out the profits from a given level of operations, the capital required and how the capital will be found to commence operating.
• Risk analysis of the preferred solution. Risk analysis may take the form of basic break-even analysis, i.e. the level of business operation that will ensure that the business does not incur a loss. Sophisticated analysis may consider various business scenarios based on the assumptions made in costing and market analyses.
• Comparative analysis of alternatives should reflect the objectives of the project. For example decision making may be based on maximising profit or minimising of loss for various business scenarios. Some alternatives may be riskier, which will be reflected in higher financial payoffs under certain scenarios and potential losses under other scenarios; while some may be less risky with low financial profits or losses under a wide variety of circumstances. The choice between a “high payoff but high risk of failure” option instead of a “low payoff with associated low risk” option is one that you can then make in the context of your objectives, your market and your financial situation.
• Recommendation of the preferred alternative with an associated plan of action; or a decision not to proceed, should be covered in this section. Possible plans of action will be – going back to the drawing board, developing more promising alternatives, further research to minimise possibility of failure or moving forward to develop detailed business plan.