Feasibility Study vs.

Business Plan

 There is nothing in the world as powerful than an idea whose time has come (Victor Hugo )

 Courage is the first of the human qualities because it is the quality which guarantees all the others. Winston Churchill What would life be if we had no courage to attempt anything? Vincent Van Gogh The greatest risk of all is the risk of riskless living. Stephen R. Covey This is the true joy in life: Being used for a purpose recognized by yourself as a mighty one, being a force of nature instead of a feverish, selfish little clod of ailments and grievances, complaining that the world will not devote itself to making you happy. George Bernard Shaw

What is a Feasibility Study?

A feasibility study provides an Investigating function that helps answer Should we proceed with the proposed project idea? Is it a viable business venture? A feasibility study should be conducted to determine the viability of an idea BEFORE proceeding with the development of a business.

Levels of Feasibility Assessment

A feasibility study of an idea is conducted at three levels Operational Feasibility
Will it work?

Technical Feasibility
Can it be built?

Economic Feasibility
Will it make economic sense if it works and is built? Will it generate PROFITS?

Why do a Feasibility Study?

Provide a thorough examination of all issues and assessment of probability of business success Give focus to the project and outline alternatives Narrow business alternatives Surface new opportunities through the investigative process Identify reasons NOT to proceed Enhance the probability of success by addressing and mitigating factors early on that could affect the project Provide quality information for decision making Help to increase investment in the company Provide documentation that the business venture was thoroughly investigated Help in securing funding from lending institutions and other monetary sources

Steps for an Economic Feasibility Study

Identify and Estimate all Capital Expenditures Identify and Estimate all Variable Costs related to the Proposed Business Venture
Identify People and Skills required to operate
Determine Wages, Salaries, and Benefits

Identify and Estimate Project Related Costs

Infrastructure development or improvements Advertising and Promotion Legal Fees Municipal & State Development taxes

Identify and Estimate all Fixed Costs

Estimating Total Capital Requirements

Assess the seed capital needs of the business project and how these needs will be met Estimate capital requirements for facilities, equipment and inventories Replacement capital requirements and timing for facilities and equipment Estimate working capital needs Estimate start-up capital needs until revenues are realized at full capacity Estimate contingency capital needs (constructions delays, technology malfunction, market access delays, etc.) Estimate other capital needs

 Estimate Equity and Credit Needs

Identify alternative equity sources and capital availability
Producers, Local Investors, Angel Investors, Venture Capitalists

Identify and assess alternative credit sources

Banks, Government (direct loans or loan guarantees), Grants, Local and State Economic Development Incentives

Assess expected financing needs and alternative sources

Interest Rates, Terms, Conditions, Covenants, Liens, Etc.

Debt to Equity Levels

Utilize data collected to determine economic feasibility: Estimate Expected Costs and Revenue Estimate the Profit Margin and Expected Net Profit Estimate the sales or usage needed to break-even Estimate the returns under various production, price and sales levels to create a sensitivity analysis Assess the reliability of the underlying assumptions of the financial analysis Benchmark against industry averages and/or competitors Identify limitations or constraints of the economic analysis Project expected cash flow during the start-up period Project income statement, balance sheet when reaching full operation

What Defines Feasibility?

A feasible business venture is one where
the business will generate adequate cash flow and profits, the business will withstand the risks it will encounter, the business will remain viable in the longterm, and the business will meet the goals of the founders.

What Next?
After the feasibility study has been completed and presented to the leaders of the project, they should carefully study and analyze the conclusions and underlying assumptions Next they will decide which course of action to pursue
Potential Courses of action include
Choosing the most viable business model, developing a business plan and proceeding with creating and operating a business Identifying additional scenarios for further study Deciding that a viable business opportunity is not available and moving to end the business assessment process Following another course of action

Developing a Business Plan

What is a Business Plan?

A Business Plan summarizes the plan of action after a course of action has been determined through the Feasibility Study A Business Plan provides a Planning function A Business Plan outlines the actions needed to take the proposal from idea to reality A Business Plan tells How your business will be created and Why it will be successful A Business Plan provides a road map for strategic planning

Why Write a Business Plan? Put the Pieces TogetherDo the pieces fit
together in a logical manner? Create a Blueprint for Action Focus Founders and/or Management Team Obtain Financing Attract Equity Investment Attract Key Managers and Employees Obtain Contracts Create Joint Ventures, Mergers, Acquisitions

Whats wrong with most business plans?

Most waste too much ink on numbers and devote too little to the information that really matters to intelligent investors.

W.S. Sahlman How to write a great business plan, Harvard Business Review, July-August 1997

What you have to point out in a business plan?

We have to take into account four independent factors critical to every new venture:
The People (management team, employee, outside parties providing key services or important resources for it); The Opportunity (a profile of the business: what it sell and to whom, whether the business can grow and how fast, what its economics are, who can stand in the way of success); The Context (the regulatory environment, interest rates, demographic trends, inflation and the like); Risk and Reward (an assessment of everything that can go wrong and right, and a discussion of how the entrepreneurial team can respond).

The People
Ideas are a dime a dozen most of the time, only execution skills counts Questions to have in mind, when you craft this part of the business plan: Where are the founders from?; Where have they been educated?; Where have they worked and for whom?; What have they accomplished professionally and personally in the past?; What is their reputation within the business community?; What experience do they have that is directly relevant to the opportunity they are pursuing?; What skills, abilities and knowledge do they have?; How realistic are they about the ventures chance for success and the tribulations it will face?; Who else need to be on the team?; Are they prepared to recruit high-quality people?; How will they respond to adversity? Do they have the determination to make the inevitable hard choices that have to be made?; How committed are they to this venture?; What are their motivations?

The Opportunity
Investors are looking for businesses in which management can buy low, sell high, collect early and pay lateif its possible! The venture should be set up in an industry that is large and/or growing, and thats structurally attractive. The business plan have to prove the economically viable access to customers. The list of questions about the new ventures opportunity focuses on the direct revenues and the cost of producing and marketing a product.

The Opportunity
Questions to have in mind, when you craft this part of the business plan:
Who is the new ventures customer? How does the customer make decisions about buying this product or service? To what degree is the product or service a compelling purchase for the customer? How will the product or service be priced? How will the venture reach all identified customer segments? How much does it cost to produce and deliver the product or service? How much does it cost to support a customer? How easy is it to retain a customer?

The Opportunity
Other questions an investor will have in mind about the business opportunity:
When does the business have to buy resources, such as supplies, raw materials and people? When does the business have to pay for them? How long does it takes to acquire a customer? How long before the customer pays? How much capital equipment is required to support a dollar of sales? Who are the new ventures current competitors? What resources do they control? What are their strengths and weaknesses? How will they respond to the new ventures decision to enter the business? How can the new venture respond to its competitors response? Who else might be able to observe and exploit the same opportunity? Are there ways to co-opt potential or actual competitors by forming alliances?

The Context
Macroeconomic environment:
Level of economic activity; Inflation; Exchange rates; Interest rates.

Government rules and regulations:

Tax policy; Monetary policy through Central Bank.

The Context
Business plan should:
include a presentation of new ventures context and how it helps or hinders the proposal; describe how the inevitable changes in the context affect the business; point out what management can (and will) do in the event the context grows unfavorable; explain the ways (if any) in which management can affect context in a positive way (management might be able to have an impact on regulations or industry standards through lobbying efforts).

Risk and Reward

A business plan is a snapshot of an event in the future (a picture of the unknown). A business plan should present people, opportunity and context as a moving target, focusing attention on the dynamic aspects of the entrepreneurial process. A business plan have to point out and asses the risks and rewards for investors.

Risk and Reward

A business plan should point out that there is a back up plan, in case things go wrong. There are no immutable distribution of outcomes, therefore the responsibility of the management is to change the distribution of these, by increasing the likelihood and consequences of success, and by decreasing the likelihood and implications of problems.

Risk and Reward

How this success story will end? How can the investors take their money out of the business? Can the company be taken public at some point in the future? From whom you raise capital is often more important than the terms.
Unsophisticated investors panic easily when things are going wrong and often refuse to advance the company more money; Sophisticated investors, usually when things go wrong roll up their sleeves and help the company solve its problems.

 A Business Plan must demonstrate mastery of the entire entrepreneurial process, from identification of opportunity to harvest.

Classical structure of a Business Plan

Executive summary Product or service Management team Market and competition Marketing and sales Business system and organization Implementation schedule Opportunities and risks Financial planning and financing

 Feasibility study answers the bottom line questionIs this venture going to make money? Feasibility study outlines and analyzes several alternatives or methods of achieving business success Feasibility study is conducted before a business plan Business plan is prepared only after the venture has been deemed to be feasible Business plan deals with only one alternative or scenario that is determined to be the best alternative Business plan considers the management sidegoals and objectives of the planned business venture

Feasibility Study vs. Business Plan

A funny glossary of business plan terms

What they say.
We took our best guess and divided by 2. We project a 10% margin..

And what they really mean..

We accidentally divided by 0.5

We did not modify any of the assumptions in the business plan template that we downloaded from the Internet To complete the remaining 2% will take as log as it took to create the initial 98% but will cost twice as much. So do the other 50 entrants getting funded We have not yet asked them to pay for it. Also, all of our current customers are relatives.

The project is 98% complete

We only need a 10% market share Customers are claming for our product

A funny glossary of business plan terms

What they say.
We are the low-cost producer We seek a value-added investor.. If you invest on our terms, you will earn a 68% internal rate of return.. Our management team has a great deal of experience. A selected group of investors is considering the plan

And what they really mean..

We have not produced anything yet, but we are confident that will be able to We are looking for a passive, dump-asrocks investor. If everything that could ever conceivably go right does right, you might get your money back. Consuming the product or service. We mailed a copy of the plan to everyone in Pratts Guide.