Chapter III Feasibility Plan

8/13/2019 Chapter III Feasibility Plan

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Chapter III

Feasibility Planning

Dr. Gopalakrishna BVAssociate Professor

AJIM, Mangalore


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Concepts of Feasibility Planning

Fundamental of a good feasibility plan

Components of feasibility planStages of growth model


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The success of an enterpr ise depends upon theentrepreneur doing the r ight thing at the r ighttime.

Starting a new enterprise is a very challengingand rewarding task.

An entrepreneur has to take numerous decision,

r ight f rom the conception of a business idea, upto the start of production.

Hence, the identification of the project to beundertaken, requires an analysis of the project indepth.

Therefore, feasibil i ty plan of the project has to beconducted before prepar ing a feasibil i ty report ofthe project.


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Feasibil i ty study is done to find whether the

proposed project would be feasible or not.

It is important to demarcate environmental

appraisaland feasibility study at this point.

Environmental appraisal is carried out to assess

the external and internal environment of thegeographical areas, where, entrepreneur intends

to set up his business enterprise.

Hence, though feasibility study would bedependent on environmental appraisal yet it is

far more descriptive


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What is Feasibility Planning

Feasibility plan contain comprehensive,

detailed information about new businessventure or enterprise about business structure,products and services, markets etc.

It is also known as moderating the concept of acomprehensive business plan.

A feasibil i ty plan encompasses the ful l range

of business planning activi ties.

It is identify the essential information neededby investors and financial institution to makedecisions about financing or loans.


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What is necessary for Feasibility Study? Provide a thorough examination of all issues andassessment of probability of business success

Give focus to the project and outl ine alternatives Surface new opportunities through the investigative

process

Enhance the probabil i ty of success by addressing and

mitigating factors early on that could affect the project Provide quali ty information for decision making

Help to increase investment in the company

Provide documentation that the business venture was

thoroughly investigated Help in secur ing funding from lending institutions andother monetary sources


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Developing a Good Plan

Feasibil i ty plans usually are written for investors

and lenders and being aware of them clear,comprehensive and easy to understand.

Writing an honest plan with well-supported

information will benef it everyone.

A well written plan should be clearly identifyingproducts, services, markets and the founders.

The plan should be easy to read, complete, and

accurate.

There should be no misspellings, improper

grammar or mistakes in data.

Entrepreneurs who know how to write a good plan.


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Feasibil i ty study can be def ined as a process for

identifying problems and opportunities,

determining objectives, describing situations,assessing the range of costs and benefits,

associated with several alternatives for solving

problems.

Feasibility study is used to support the decision-making process cost-benefit analysis of businessviability.

It includes technical, market, financial,

organisational and competitive feasibil i ty.

The Chart presents a breakdown of the factorsinvolved in a comprehensive feasibility of a new

venture.


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New VentureIdea

Determination of

Feasibility of Planned

New Venture

Key areas for assessing the Feasibility of a New Venture

Technical

Feasibility

Marketing

Feasibility

Financial

Feasibility

Organisational

Feasibility

Competitive

Feasibility


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Components of Feasibility Plan

1. Marketing Feasibil ity

2. Technical Feasibil i ty

3. F inancial Feasibil ity4. Organisational Feasibi l i ty

5. Competitive Feasibi l i ty

6. Social Feasibi l i ty - social point of views


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1. Technical Feasibility technical requirements forproducing a product or service1. Location of the projectrural, urban or semi-urban.

2. Construction of factory, building

building and itssize.

3. Availability of raw materials sources of supply,alternate sources, its quality and specifications cost

etc.4. Selection of Machinery capacity, cost, sources of

supply, technology evaluation of machine.

5. Utilities availability of utilities like water, gas,electricity, petrol, diesel etc

6. Staff requirement

requirement of workers,technical staff and officers etc.

7. Technical viability - opportunity


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2. Market Feasibility good market

Market feasibility is concerned with two aspects aggregate demand and market share.

For this market analysis requires variety ofinformation and appropriate forecasting methods.

Nature of the market in terms of monopolistic

or perfect competition is to be studied. Cost of Production study and control ofproduction, selling cost.

Selling price and profit selling price determines

profits. Demandpresent demand and demand forecast

Market sharecomparison with market share

Target Marketwhom targeted


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In addition, a wide variety of information would berequired to be collected as given below.

1. Consumption trends in the past, present consumptionlevels and consumption trends for the future.

2. General performance of the I ndustry to which the

product belongs.

3. Past and present supply position.4. Production possibi l ities and i ts constraints.

5. Structure of competition national and international

6. Demand elasticity

7. Consumer behaviour with respect to preferences,

attitudes, brand loyalty, religious beliefs,

adverti sements etc.


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3. Financial Feasibility financial feasibility is themost important aspect of a business opportunity.

1. Total capital cost of project fixed capital,

working capital and interest factor.2. Sources of capital main sources of capital

interest burden studied in detail. Subsidiarysources of additional finance

3. Break Even Analysis (BEA)

4. Estimation of cash and fund flow

5. Return on invest (ROI) amount of return oninvestment for the investors/share holders.

6. Proposed balance sheet liabilities and assets,depreciation, interest burden, profits expected etc.

7. Cost of labour and technology employees

salaries and R and D expenditures.


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5. Competitive Feasibility

Existing competitiveness

size, financial resources

market environment

potential reaction of competitive advertisement and sales promotion

potential of new competitors.


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6. Social Feasibility

It is not enough if a project is feasibility from

marketing, technical and financial point of

views.

A project should also be acceptable from the

social point of view.

The social benefits and costs which can be

different from monetary benefits and costs.

A social feasibility study is carried out and

tries to answer the following questions.


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1. What natural resources of the country is theproject draining

2. What is the impact of the project on theenvironmental ways.

3. What is the community reactions about to aparticular project.

4. Does the project displace people? If so who/ HowMany? What is the

5. What is the cost involved in restoring damages

done to the environment6. What would be the contribution of the project

towards achieving local employment, self-sufficiency and social order.


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Feasibility Report

Feasibility report contain comprehensive,

detailed information about new business

venture or enterprise about business structure,

products and services, markets etc.

It is also known as moderating the concept of acomprehensive business plan.

A feasibil i ty plan encompasses the ful l range

of business planning activi ties.

I t guides the entrepreneur in actual ly starting

up and running the business venture.


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Feasibility report used to support the decision-making process cost-benefit analysis of businessviability.

It includes technical, market, financial,organisational and competitive feasibil i ty.

The feasibility report should be prepared by theentrepreneur, he or she may consult with manyother sources in its preparation.

Lawyers, accountants, marketing consultantsand engineers are useful in the preparation of theplan.

A Feasibility report includes

generation of ideainto a successful venture - research internal andexternal opportunities, threats, strength andweakness of the new venture.


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Contents of a Feasibility Report

1. Objective and scope of a feasibility report

2. Product characteristics specifications, uses and

application, standards, quality etc.3. Market position and trends anticipated demand, market

information, price structure

4. Raw-materials requirement prices, sources properties ofraw-materials

5. Manufacturing processes

selection of process, productionschedule and techniques.

6. Plant and machinery - tools and equipments

7. Requirement of land area, building, construction schedule

8. Marketing channels

trading strategies and marketingstrategies

9. Requirement of personnel labour and expenses of wagepayment.


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EIGHT COMMON ELEMENTS IN A FEASIBILITY PLAN

Executive

summary

Venture defined, products or services identified, market

characteristics summarized, financial structure profiled

Business concept Purpose of the venture, major objectives of its founders, description

of the firm.

Product or

service

Function and nature of products and services, proprietary interests,

attributes and technical profile.

Market researchand analysis

Customers, markets, industrial structure, expected competition andsales forecasting

Market Plan Market strategy, pricing, promotion, distribution, warranties and sales

leadership

Manufacturing Facilities, location, inventory and materials, human resources,

technology, security, insurance, safety

Entrepreneurial

team

Profile of founders, key personnel, investors, and management roles

Financial

documentation

Financial statements, assets and liabilities, break-even analysis


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There are eight elements in a feasibility plan.

They are

1. Executive Summary

2. Business Concept

3. Product or Service

4. Market Research and analysis

5. Market Plan

6. Manufacturing or operation7. Entrepreneur ial team

8. F inancial documentation


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1. Executive Summary

It is a synopsis of the proposed enterprise that isintended to attract interest of all concerned. This

includes

The executive summary is a summary of all key sectionsof the feasibility study

1. Definition of the business venture nature andpurposes of the new venture.

2. Product or service what wil l be sold development ofproduct/service

3. Market characteristics nature of the market, cost ofproduction, sel l ing price, market share, target market.

4. Entrepreneurial team founder and other personnel.

5. F inancial summary start-up estimates, cash-flow

requi rement BEP.


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4. Market research and analysis

The objective of market research and analysis is toestablish a fact as the existence of the proposed venture.

Entrepreneurs must provide a credible summary ofpotential customers, markets, competitors, pricing,promotion and distribution.

Potential customers demographic information age,sex, family income, occupation etc.

Marketdemands, market trends and opportunities forthe new business.

Competition

direct and indirect competition,competitorsSWOT Analysis.

Pricing system normal prices, pricing policies,methods of discounting credit policies, price strategies.


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7. Entrepreneurial team

Entrepreneur must take care to profile the entrepreneurialteam honestly but effectively.

They should emphasize positive and negativecharacteristics of team members.

8. Financial documentation

Money is the objective standard of measurement toassess the progress of the firm.

What are your Start-up capital requirement

What are your requirement for Working capital

Fixed and variable cost requirement Financial statements of new venture are projected based

on previous project.

Analysis of break-even point and cash flow budgets.


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Stages of Growth Model

A business venture starts growing after it is set up

venture gets started on its own. It needs planning and setting up

The venture if planned properly will easily

manage the start up stage and survive and glideinto the growth stage, prosper and expand.

If the going gets rough and the entrepreneur finds

it tough the venture can lose ground and slip intomaturity and then decline.

All ventures do not pass through all the stages in a

given sequence.


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No time limit can be assigned as to how long a

firm would stay in each of these stages.

A venture that has moved into the matur ity

stage or the decline stage can make a come

back into the growth stage again and begin to

expand and prosper.

In theory the firm progresses through certain

stages during the course of its life cycle

The pre-start up, Start up stage, Prosperitystage, Expansion stage, Shake out stage,

Matur ity stage and Decline stage


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Decline

Maturity

ShakeOut

Expansion

Growth&

Prosperity

Pre Start up Stage

Time Period

DemandandOutput

O X

Y


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The Growth cycle of A New Venture

The five stages of growth model consists of

categories of distinct activities essential for anew venturegeneration of idea to starting andrunning a business enterprises.

The four stages are

1. I state Pre-start-up stage

2. I I stage Start up stage

3. I I I stage Early growth stage4. I V stage Later growth stage

5. V Stage Decline stage


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The Life Cycle of the Company


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Pre-start up

stageStart up stage

Early Growth

Stage

Later Growth

Stage

Plan the Venture

Preliminary work

Obtaining resourcesOrganising

Early growth stage

Major changes in

Markets, finances and

resources utilisation

Initial period of business

Starting new business venture

Necessary adjustment to survival

Evolution of a venture into large

companyFacing competitions with others

Professional management


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Pre-start up stage

Concept feasibility

Business PlanResource Acquisition

Planning the venture

Preliminary work

Start up stage

Customer acquisition

Cash flowInfrastructure

Necessary adjustment

Growth stage

Cash flow

Staffing

Financial System

Major changes in markets,

finances and resources

utilisation

Maturity stage

InnovatingCustomer retention

Professional management

Managing resources

Decline

Demand declines

Substitute availability

Decline sales and profits

Wasteful expenditure

Sick units emerging


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1. Pre-startup stage

This stage is also called the foundation or ini tial

stage and gives a sense of direction to the entireventure.

The product idea, the feasibil i ty study, product

development all constitute a significant part of thepre-startup stage.

This stage also extend into capital mobilising,

construction of building activities, instal lation of

the machinery.

In this stage entrepreneurs faces many problems

and chal lengesnew business venture.


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Entrepreneurs wil l begin by asking questions

about the actual potential of their

products/services

Production, operations, markets, competitors,

costs, financing and potential profits etc.

There are four activities common to all new

business venture, these are business concept

identification, product-market study,

financial planning and pre-startupimplementation.


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Business concept

defined

Product-market

study

Financial Planning

Pre-start-up

Implementation

What is the purpose of the new

Venture

What does entrepreneurs

Want to accomplish with business

Product research

feasibility study

Market research

Financial Projectioncash needed,

Income Generation, expected

Expenses Investment and

borrowing

Getting ready to start


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Market research

1. Who will buy the product or service?

2. What will they will be willing to pay?

3. How can I attract them to my business

4. If this venture is a big success what willprevent competitors.

5. Can I establish a niche in the market?

6. What are my options for long-term growth? Financial Planningmoney

Pre-start up implementation


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The start-up stage is the initial period of

business.

For companies with products or services to sell,

it is the first foray into revenue generating

activities.

The start-up stage has no definite time frameand these are no models to describe in this

stage.

This stage constituting two types of objectives

1. Start-up operating objectives

2. Meeting operating objectives


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Sales To attain monthly sales volume as

projected at prices

To achieve projected sales of mix of

products

Revenue Sales volume and price projected

Growth Incremental growth within seasonal

patterns

Position Long term positions


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3. Early Growth Stage (Growth stage)

Once the venture is positioned, successful

enterprises will experience a stage of early

growth.

This is a period of intense monitoring, and

growth can occur at different rates along a longcontinuum slow growth through higher

growth.

Very slow Comfort zone Very rapid


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The real growth of the company undertaken duringthis stage.

The enterprise grows rapidly and the one manshow is giving way to delegation.

In this stage the entrepreneur should groom others,share the responsibility and decision making

authority. The enterprise widens its product l ine, developsnew products, and enters new market segments.

The revenue earnings exceed the expenditure andthe income earnings grow substantially.

Various R and D activities carried by entrepreneursduring this stage.


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One of the danger faces by firm during the

growth stage is financial crises when the right

and low cost funding is not chosen forexpansion.

High cost funds can cause and interest burden.

4. Later growth stage (Maturity Stage)

Volume of sales goes on rising but at

decreasing rate.

This is the stage where maximum expansion

and sales undertaking no more inclined to

grow further.


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It has touched every corner of the market both

domestic and international market.

The profits do not keep pace with the rise in

sales.

There is more expenditure incurred in

advertising and sales promotions.

The enterprise shuts down its fringe operations

and non-profit making and less profit making

business activities and branches.


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5. Decline Stage

From matur i ty, an enterprise can slip into thedecline stage when the management does notcome up with the required effort to save thecompany.

I n the decline stage, the firmsproducts are notin much demand.

There are better and cheaper substi tutes that areavailable in the market.

The sales decline rapidly and profits nose dive.I nventory level of f inished goods goes up.

In such a situation, the enterprise has tocompletely change its product line and beginmanufacturing new products that are in demand.


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It should diversify its product line and exerciserigid measures, to cut down unproductive andwasteful expenditure.

In the decline stage that sickness of the enterprisebecomes evident. It finds it difficult to meet itsfixed and variable costs.

The working capital advances from the banks arediverted to pay off the creditors and there is nomoney to buy raw material.

Advertising expenditure becomes unaffordable.

Slowly and steadily skilled and trainedemployees leave and getting their replacementbecomes diff icul t.

Shut down or sell out of enterprises.

Chapter III Feasibility Plan

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