A feasibility study is a fundamental document for starting and implementing a new or existing business enterprise. It is an important aid in project formulation and implementation. The study helps the promoters and other investors to generate, crystallise and focus their ideas, to set objectives and monitor performance against them. The feasibility study is used as a proposal to outside potential investors such as development, merchant and commercial banks, venture capital companies, bilateral and multilateral lending institutions and others for external funding either in form of loan, lease or equity participation. It is therefore important that the document must be persuasive enough to convince potential investors of the need for funding. Some researchers also refer to a feasibility study as a proposal, a business plan, a prospectus or a game plan.
It is also very significant for project promoters to know that all business enterprises, whether big or small, medium or large, involved risk. Therefore, preparing a feasibility study is a means of identifying possible areas of risk and thus minimizing the problems that will inevitably arise. However carefully the business is planned, there is still the possibility of failure. Some unplanned businesses do indeed prosper, but the chances of success without careful planning are very much reduced. The preparation of a feasibility study is therefore an essential step in the setting up and financing of any profit making venture.
The feasibility study forms the basis of providing information to prospective investors and bankers. It also provides a yardstick against which the management and investors will monitor the success achieved. It is therefore very important that the preparation should involve careful research and analysis. The content and clarity of the presentation will be a major factor in establishing confidence and credibility with prospective investors. In preparing the study, the promoters should thoroughly investigate the business concept, decide how they will operate the business and put the information in a systematic and logical way using the format explained in this book. In doing this, the study must examine and explain the promoters’ intentions, the historical background of the project, the reasons for undertaking it and they way they see it being developed.
More often than not, potential investors need to be able to assess the background, skills and business experience of the core promoters and their ability to implement and manage the project successfully. They also want to see if the projections and assumptions made in the study are reasonable by testing them against the lending criteria for the type of business being proposed. When preparing the study, actual and potential problems should be identified and addressed. The size and content of the study will vary with the nature of the project and extent of finance required for its implementation.
Importance of Feasibility Study.
Capital investments involve financial outlays on fixed assets which brings in returns extending over a period of time, usually five years or more. Because of the long term nature of capital projects and the elements of uncertainty and risks built into it, institutional investors carefully assess all the technical, economic and social parameters associated with the project to establish with certainty its feasibility and viability. Potential investors are always busy with limited time and resources to spend on project financing proposal sent to them for funding. Very often, only few investors seriously follow up more than one in ten proposals presented by project promoters. To convince investors on the need to invest in a project, the promoters must present a proposal that is technically feasible and financially viable. To do this, the entrepreneur must emphasize the salient factors in the study. These factors could relate to the uniqueness of the product or service, the market potential, production advantages, quality of management and other key success factors.
However, it is also important to know that a feasibility study is not the same as a financial proposal. Instead, it is a comprehensive document that contains information on all the functional areas of the proposed business. Besides, not all feasibility studies are intended for project financing. Some may be used by the promoters or management as an operational plan to manage and direct its operations so as to stay on target and on budget during the course of project implementation. In a nutshell, a feasibility study helps the entrepreneur to make investment decisions which is needed by investors to determine the viability of the project. Such investment decisions when arrived at, reduce the risk on failure and possible mortality of an enterprise.
The types and nature of a feasibility study vary depending on the need of the promoters. It could be tailor made to suit the need of a particular entrepreneur and funding agencies using the parameters and guidelines provided by the investor. In other instances, the study could be made to take advantage of products or services with investment potential in an area suitable for attracting potential and existing entrepreneurs, investors and the investing public to make investment decisions.
Structure of a feasibility Study.
An essential feature of a feasibility study is that it must be completely objective and unbiased. Regardless of its structure, scope or contents, a feasibility study represents an orderly collection of accurate and objective information prepared in such a way that it is acceptable to prospective investors who are expected to fund the project. The promoters and others involved in preparing the study should appreciate that a feasibility study is a scientific exercise which combines engineering, economic and financial analysis to determine whether a specific project is viable when it sets out to measure its commercial and economic value.
In most cases, the study is prepared by someone other than the promoters who make some projections to arrive at an investment decision. In other instances, the study is prepared for an interested institutional or private investors with substantial input and in close collaboration with him. In recent times however, it is not uncommon for a feasibility study to be prepared for project promoters by staff of a consulting firm, a development agency, a government establishment or by independent industrial management consultants. It follows therefore that a study which lacks the essential structure and elements of independent and professional quality authorship will have little or no value for attracting private investment since potential investors will not believe its contents or its conclusions.
Before taking any investment decision, the promoters with the assistance of consultants should have studied the proposed project carefully and sufficiently to satisfy themselves that a market exists for the product, that materials can be obtained at a reasonable cost, that labour and infrastructural facilities and services are available, that plant, machinery and equipment of a certain size, kind and cost will be appropriate, affordable and sustainable and that revenues will exceed production costs by a sufficient margin to provide a satisfactory return on investment.
Structurally, the feasibility study should be long enough to cover the subject matter adequately and short enough to maintain the interest of the potential investors. The length should therefore depend on the nature of the project and the extent of finance required. A rule of thumb is that if a feasibility study is not technically feasible and financially viable on paper, it is very certain that it cannot work in the market place. The study must therefore be properly articulated in its focus, contests, language and assumptions not only to attract finding but also to serve as an important guide and operational plan during implementation.
The outline of a feasibility study is not constant but the following contents are highly suggested.
1. Executive Summary.
2. Project background and history.
3. Products to be made or services to be rendered.
4. Markets and marketing techniques including the market, competition, marketing and sales distribution methods.
5. Project engineering including manufacturing, process and plant operations, raw materials and input.
6. Management and organizational structure.
7. Project finance.
8. Financial analysis including determination of total capital Costs, working capital requirements and financial statements.
9. Risk analysis, reward and various assumptions underlying profitability projections.
A content page is also required to aid the reader and others who are interested in the feasibility study to identify and easily access the information. There is also the need to have an appendix or annexures for the various assumptions made in writing, the study and other projections made for determining the project viability and profitability.
Decision Making Stages.
The assurance that there exists a market for the product or service is the most important decision to be considered by the promoters. If the market study indicates that there is a market for the product, project sponsors should proceed to undertake the technical study. Otherwise the technical study should be discontinued and the project idea dropped. If the technical study shows that the product or service contemplated could be technically and technologically produced at a cost much lower than the determined selling price in the market study, the promoters should proceed with the financial study. Otherwise the project idea should be discontinued. In the setting manner, of the financial analysis shows a favourable return on investment, the project proposal should be prepared for funding.