Why a Feasibility Study is so important and What are the Essential Parts?

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By: Site Engineer, Staff

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A feasibility study is very important to investors. Feasibility study usually among the important documents on the basis of which banks may grant loans to investors, therefore, should be taken seriously.

A feasibility study is very important for any new venture. Normally it should be made up of two broad parts; the executive summary and the main body.

The executive summary is a quick and brief summary of what is detailed in the main body of the report. It normally gives an overview of the whole report.

A feasibility study is an important and carefully drafted document that describes a particular project, with the aim of finding out whether it is economically viable and capable of being executed successfully. In it, the relevant dimensions and variables in the business environment that might come to bear on particular projects are evaluated, and their relationship with total capital investment assessed in order to determine the potential financial rewards that investors can expect. Such a study is usually carried out before any modern business is established. Through the findings of feasibility studies, a decision is taken either to undertake a project or to abandon it.

The feasibility study report is normally a technical report, which the entrepreneur should at times obtain the services of a management consultant to prepare the report for professional input.

The feasibility study report is always a reference report that should be referred to from time to time to check whether the set target is being met or not.

Entrepreneurs equally use the report to raise funds from the banks, aid in the business planning, and decision-making and a table evaluation of the new business venture during and after execution.

ESSENTIALS OF FEASIBILITY STUDIES

The entrepreneur from the very day the idea of the project was initiated has to ask himself these questions below:

  • Will this idea be practicable and feasible?
  • Will it be viable?
  • Will the needed technology be available locally?
  • Will the needed raw materials be available locally?
  • Will we be able to fight effectively our competitors?
  • Will we have the market for the product; what market strategy will we adopt?
  • Will we be able to meet the financial requirement?
  • What equity ratio can we provide?
  • How will the remaining capital be raised?
  • What quality of personnel should we employ?

These questions have to be an entrepreneur should analyze critically before setting off to prepare the feasibility report.

A good feasibility study may take the following patterns:

(A)       Introduction

(a) Background information about the project and the industry

(b) Objectives of the study

(c) Method and Extent

(d) Time for the study

(B)       Principal Findings

Step I:

  • Information about the immediate market
  • Procedure
  • Proposal

Step II: Financial and Technical Requirement

  • Financial charges
  • Profitability
  • Liquidity
  • Investment
  • Financial plan
  • Depreciation

Step III: Economic and Legal Requirement

  • Analysis of value added
  • Analysis of impact on foreign exchange position
  • Analysis of employment effect
  • Analysis of environmental implication
  • The physical and fiscal implication

(C)       Recommendations and Conclusions

The technicalities required in the write-up of the various sections may differ from project to project. Normally, the write-up will require the information set out below.

1. Introduction

(a) Background Information About the Project and the Industry

While introducing the project, assess the overall atmosphere, market and economic situation of the particular industry. Examine the existing government regulations affecting the industry. State whether the product is in popular demand, and examine the economic justification of the project- state the possibility of using local raw materials as substitution of import to save foreign exchange.

(b) Objectives of the Study

The objectives of the studies should include the ascertaining of the followings:

  • Financing factors.
  • Availability of the needed raw materials and their supply.
  • Production in terms of volume, quality, type, design, size, packaging, etc.
  • The overall profit potential of the factory.
  • Availability of the required personnel.
  • The contribution of the industry or project to the local and national economic objectives.
  • Domestic market environment and potentials.
  • Sales and distribution factors.
  • Availability of the required infrastructure: water, power, transport, etc.
  • Considerations regarding machinery, land, building, equipment, process, and plant.

(c)        Method and Extent

State the research methods used:

  • Desk research, sample survey, personal contacts, and discussions; this may involve:
  • Suppliers of the requisite raw materials
  • Ministry officials and offices of statutes
  • Marketing and distributorship companies and the individuals dealing in the product
  • Confidential and unpublished data on the industry

(d)       The Timing of the Study

State the period, month, year during which the study was undertaken.

PRINCIPAL FINDINGS

(a) Information About the Immediate Market

Define the target market and examine the size and growth rate of the population and their projection. Find out the percentage of the urban and rural population the average number of persons per household, and their consumption habit. Examine the activity and roles of competitors and the possibility of competing or participating successfully.

(b) Proposal

On the basis of above information, propose the initial production capacity, which can be profitably handled. Then state the steps to be taken to achieve the production target set, in the following sections.

(c) Procedure

  • Factory: State proposed size and location. Explain whether land has been secured or not.
  • Production Plan: This is a very sensitive area. The aim is to arrive at a carefully mapped out plan of the factory layout necessary for optimum production. State the number of hours per shift, shift per day, days per annum; and daily volume, evaluation of possible waste, and percentage increase.
  • Personnel Requirement: Evaluate the manpower needs of the project. State number of staff, describe jobs for a key position, qualifications, and salaries. Personnel arrangement should convince financiers of how the money will be effectively managed. Indicate the total salary.
  • Management and Organization: Prescribe an organizational structure showing command hierarchy, administrative procedure, and departments. This should show how management reflects capacity and functions. Indicate whether a position should be occupied by an indigene or expatriate, where necessary.
  • Raw Materials: Describe the type of raw materials to be used whether they are to be imported or produced locally, and the reason for choosing the particular type and not an alternative. Examine the delivery price volume and duration of stock clearly.
  • Marketing: Evaluate the market situation in terms of the marketing mix and volume of products and pricing; define zones, distributors and individual company’s order. Identify competitors, assessing the quality of their products, their prices, and method of promotion. This can be done through market research. On the basis of all these, recommend a dynamic marketing strategy laying out sales force management, and indicating the total costs of implementation.
  • Pricing: Determine the average price of the product being envisaged. To do this effectively a close study of the prices of competitors should be made and the quality of their products thoroughly examined. Then, depending on the nature of the industry or firm, and findings of competitors, a standard pricing technique is employed in price determination. Such techniques include “mark-up”, “going-rate” and of course, “bidding.” The researcher should have a working knowledge of these techniques under normal circumstances the recommended price expected to allow some reasonable profit margin, which is one of the reasons for undertaking a feasibility study.

FINANCIAL/TECHNICAL REQUIREMENTS

Make sure you assess capital requirements, working capital, and an equity contribution of promoters, sources, and application of funds. Mention should be made of the type of loans available and their terms as well as the projected cash flow, break-even analysis, and tax provisions. Solvency in short and long-term should be assessed and effective cash management assured.

Describe the type of machines to be used, state reasons for choosing the particular model instead of alternatives. Seriously assess cost, maintenance, and suppliers. These points are considered in the following sections:

(a) Investments

Type of the project has to be stated, whether the project should be on large or small-scale. Consequently, state the total capital required indicating the percentage of fixed assets and working capital. Describe the sources of working capital, e.g., loans from commercial banks. Then estimate capital required for the commencement of operations. This would include the estimated cost of fixed assets, financial plan, depreciation, and finance charges.

Fixed Assets

  • Land (acquisition and development)
  • Factory/Office Building
  • Furniture, fixture, and fittings
  • Motor vehicles
  • Plant machine and equipment
  • Utilities, Generators equipment etc
  • Contingencies
  • Preliminary and preparatory expenses
  • Working capital (e.g., 2 – 3 months)

(b) Financial Plan

This will show the capital required to attain the projected levels of operation, profitability, and cash flow. The financial plan may have alternatives but the important aspect is for each of the alternatives to show equity and loan capital as well as contributions of partners.

Example:

  • Commercial banks – Short-term loan for working capital (raw material and labor)
  • Indigenous Sponsors – (60%)
  • Foreign partners – (40%)

Then state, which of the alternatives of the financial plans has higher net returns per annum and recommend it formally. Consideration should be given to the provisions of indigenization laws where they exist.

(c) Depreciation

Indicate the amount made for depreciation of fixed assets, then show:

  • The estimated value of fixed assets
  • Annual depreciation rate
  • Amount of depreciation of:
    • Motor Vehicles
    • Utilities
    • Land
    • Building
    • Plant and Machinery
    • Furniture fixtures, fittings
    • Contingencies

(d)       Finance Charges

Indicate yearly charges in respect of the loans to be raised for the working capital of the factory (mainly from commercial banks). State the alternative (financial plan) that incurs fewer charges. Accounts should be for live years showing commercial bank overdraft and interest (%).

(e)        Profitability

On the basis of the preceding actions, comment objectively as to whether the venture will be viable or unviable. Given management efficiency, especially concerning the timely procurement of adequate raw materials and dynamic salesmanship, prove that net profit will grow throughout the first 5 years. The followings should be shown:

  • No of times of returns of the cost of acquisition of entire fixed assets
  • Average profit potential in %
  • Return on total investment in %

(d)       Liquidity

Good management requires that heavy reliance on bank overdraft for working capital be discouraged as soon as possible. In that case, the surplus cash generated from the operations in the first five years may be estimated.

ECONOMIC AND LEGAL REQUIREMENT

The economic and legal feasibility of the project must be ascertained. The project, apart from being economically feasible, should be in consonance with the land. Analysis of the following should be done thus:

(a) Analysis of Value Added

The feasibility and profitability of the project should be ascertained through the following methods:

  • Net Present Value (NPV)
  • Return On Investment (ROI)
  • Internal Rate of Return (IRR)
  • Cost-Benefit Analysis (Profitability index)
  • Payback Method

The gestation period should be ascertained, so as to know whether the long or short-term loan should be obtained, because of the rate of cash generation.

(b) Analysis of the Impact of Foreign Exchange Position

The entrepreneur should analyze the effect or the impact the sourcing of foreign exchange will have on the investment if some raw materials must be imported.

(c) Analysis of Employment Effect

The multiplier effect the employment will have on the society should be analyzed and evaluated.

(d) Analysis of Environmental Implication

The comprehensive analysis of the environment should be done to ascertain the benefit the local sourcing of raw materials may have in the sourcing country.

(e) Physical and Fiscal Implication

The legal implications of the physical development, that is the zoning pattern and urban development should be known. The fiscal policies of the Government as regards the raw materials to be used should equally be known and emphasized.

RECOMMENDATIONS AND CONCLUSION

On the basis of thorough evaluation of the whole project and of its particular situation in the market, list recommendations that should be taken must seriously by promoters of the project to facilitate successful execution. Make sure that all the measures recommended and plans laid out fall within legal limits. In this wise, the researcher is expected to have a good knowledge of the company, commercial or industrial laws or may not augur well for the venture.

Do not totally be optimistic but some measure of objectivity is recommended. Be critical and assume that something may go wrong; raw materials may go up while consumer price remains unchanged; there may be strike and loss of production time. In such circumstances, only some percentage of the planned turnover may be realized.

The entrepreneur must take the issue of feasibility report very seriously as it acts as the master plan for the new project.

Above all, you should be able to tell whether the evaluation indicates that the proposed project is a feasible and viable economic venture, worthy of being invested upon.

 

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