Before committing time, energy, and resources to a new project, PMs and executives want to know: Can this project succeed? And even if the project is successful, will the outcomes justify the cost and effort it took to achieve them? These questions, and ultimately the fate of the project, can be determined through a feasibility study.
So, what is a feasibility study? In this article, we’re answering that question, and we’re also examining how to do a feasibility study to help you and your management team make better-informed decisions regarding which projects get funded and which get tabled or scrapped altogether.
Doing a feasibility study is a critical first step when you are considering starting a new business. A feasibility study helps you determine if your business idea is viable and worth pursuing. It involves gathering data about your industry, the potential market, and projected costs and revenues. Conducting a thorough feasibility analysis will help set your new business up for success.
Here is a step-by-step guide to carrying out a complete feasibility study
Step 1: Preliminary Analysis
The first step is to do some initial research to determine if your business idea is worth investigating further. At this stage, you want to identify any major roadblocks or showstoppers that could prevent your business from being successful.
Start by clearly defining your business concept. What product or service will you provide? Who will your target customers be? Next conduct preliminary market research to gauge if there is demand for what you want to offer. Look at potential competitors industry trends and growth projections. This initial analysis will help you determine if the opportunity exists to successfully enter the market.
Step 2: Prepare a Projected Income Statement
Once you have confirmed there is an opportunity worth exploring, the next step is to put together a projected income statement. This important financial statement estimates the potential revenues and expenses for your first few years in business.
To create a projected income statement:
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Estimate your start-up costs – This includes any funds needed for rent, equipment, inventory, insurance, licenses and other one-time expenses to open your doors.
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Project your sales revenue – Research your potential market size and projected growth. Factor in prices you plan to charge for your products/services. Calculate your expected annual sales.
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Forecast operating expenses – This includes ongoing costs like rent, payroll, supplies, utilities, etc. Identify all recurring monthly and annual expenses.
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Include taxes – Account for any applicable federal, state and local taxes in your projections.
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Calculate profit potential – Subtract your expenses from projected revenue to determine your anticipated net profit.
Having these numbers will help you realistically assess the earning potential of your business idea.
Step 3: Conduct a Market Survey
Now it is time to conduct in-depth market research. Your feasibility study should include detailed information about your industry, target market, and competitors.
Industry analysis – Look at size, growth rate, trends, competition level, regulations, and risks or barriers specific to the industry.
Target market analysis – Define your ideal customer segments. Analyze their demographics, psychographics, buying behaviors and needs. Estimate the total size and value of your target market.
Competitive analysis – Identify your direct and indirect competitors. Study their offerings, pricing, strengths and weaknesses. Look for potential competitive advantages you could leverage.
Market survey – Create and distribute surveys to prospective customers. Use this primary research to validate interest in your offerings and guide pricing.
Allow ample time for thorough market research. The more informed you are, the better prepared you will be to launch and run your business.
Step 4: Plan Business Organization and Operations
Now it is time to start planning the execution – establishing how your business will be structured and operated.
Important elements to define:
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Business entity structure – Will you be a sole proprietorship, partnership, LLC or corporation? Consult professionals to determine the optimal business structure.
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Licenses, permits & insurance – Research all legal requirements to operate your type of business. Plan to obtain necessary licenses, permits and specialized insurance.
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Location considerations – Identify ideal locations for your store or office space. Factor in purchase or rental costs, utility expenses, and any zoning restrictions.
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Staffing requirements – Determine how many employees you need for optimal operations and estimate payroll expenses.
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Inventory & supplies – Project your inventory needs and costs. Identify reliable suppliers and supply chains.
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Operating procedures – Document processes for sales, production/service delivery, order fulfillment, customer service, etc. Establish accounting systems.
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Financial management – Set up business banking accounts. Select your accounting software. Implement bookkeeping processes and cash flow controls.
Thoroughly planning these operational details is imperative for being fully prepared to launch your business.
Step 5: Prepare an Opening Day Balance Sheet
Now it is time to prepare a balance sheet that reflects your anticipated financial position on opening day. This important financial statement summarizes the assets, liabilities and equity of a business.
Your opening day balance sheet should include:
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Current assets – This includes cash plus assets that will be converted to cash within a year like accounts receivable and inventory.
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Non-current assets – This includes long-term assets like physical property and equipment, furnishings, vehicles, etc.
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Current liabilities – This includes any debts payable within 12 months like accounts payable, taxes, and the current portion of loans.
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Long-term liabilities – This includes long-term debt obligations like business loans, mortgages, etc.
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Owner’s equity – This is calculated by subtracting liabilities from assets. It represents the owner’s financial stake.
Having an accurate opening day balance sheet helps confirm you have secured adequate financing and assets to support your new venture.
Step 6: Review and Analyze All Data
In this final step, take time to thoroughly review all the data gathered and analysis completed in the previous steps.
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Look at everything holistically to ensure your projections are realistic and aligned across all financial statements.
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Verify your competitive advantage and confirm your business can be profitable.
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Identify any additional risks or challenges not yet accounted for.
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Outline next steps should you decide to proceed with launching your business.
Creating a detailed feasibility study that realistically projects costs, profitability, and potential challenges takes time. But the investment is well worth it. Conducting thorough due diligence on the front end increases your chance of success and provides peace of mind that your new business has been thoroughly vetted before you proceed.
The feasibility study provides a roadmap to follow as you start your exciting entrepreneurial journey. With careful planning guided by data-driven analysis, your new business idea can turn into a profitable, sustainable enterprise. Let the feasibility study give you the foundation needed to build your dreams into reality.
The seven feasibility study steps
Feasibility studies should include the following steps:
- Preliminary analysisJust as the feasibility study determines whether a proposed project is worth the effort, the preliminary analysis determines whether the feasibility study itself is justified. The fact is that conducting a feasibility study is an intensive, time-consuming process, and the preliminary analysis will look to uncover any roadblocks that would render the feasibility study useless.
- Defining the scopeBefore you can determine the potential impact of a project, you have to get clear on the project’s scope. This includes defining the project’s goals, tasks, phases, costs, deliverables, and deadlines. The project scope also identifies internal stakeholders as well as external clients and customers.
- Market research Is there a demand for this particular venture in the market it seeks to serve? This is critical information to know before committing to a project, and it’s precisely what market research seeks to answer. Market research also gives insight into the current competitive landscape and helps identify factors like geographic influence on the market, the market’s overall value, and demographics.
- Financial assessment Naturally, the feasibility study will break down and analyze the financial costs and risks involved with the project. Costs may include human resources, equipment, material, software, hardware, facilities, and third-party services. Additionally, the financial assessment will look at the potential impact that project failure will have on the bottom line.
- Roadblocks and alternative solutions What are the potential problems and circumstances that could lead to project delays or even failure? What are some alternative solutions that would circumvent those problems? Most feasibility studies will include an assessment of these factors, too.
- Reassessment At this step, you should seek a reassessment of the entire feasibility study from top to bottom by a fellow PM, a manager, or someone else in your organization. Having a fresh set of eyes on the study will help ensure you don’t miss any key elements or miscalculate potential project impacts.
- Go or no-go decisionWhen it’s all said and done, the feasibility study comes down to one decision: Is the project approved to move forward or not?
While conducting a feasibility study may sound complicated, there are actually thousands of real-world examples happening all around you all the time. It helps to understand the different kinds of feasibility studies first, which include:
- Technical feasibility: Whether you have the technology and knowledge of how to use it to complete your project.
- Legal feasibility: Whether your project meets all necessary legal requirements.
- Operational feasibility: Whether your project can be carried out according to your organizations capacity, resources, and operational processes.
- Time feasibility: Whether your project timeline fits with the rest of your organizations schedules.
Any and all of these feasibility studies can be found in real-world examples. Consider the following:
- A busy father is running errands and figures out whether he can complete the weekly grocery shop in between dropping his son off for chess practice and picking his daughter up from a party. He has just conducted a time feasibility analysis.
- A teenager is choosing a new phone to buy, and researches which model will be the most compatible with his most-used apps and platform. He has just conducted a technical feasibility analysis.
The amount of detail included in your feasibility analysis depends on your organization and your chosen project. To make the most of your next feasibility analysis, lets take a look at some best practices.
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How do you conduct a feasibility study?
Conduct a Market Survey or Perform Market Research This step is key to the success of your feasibility study, so make your market analysis as thorough as possible. It’s so important that if your organization doesn’t have the resources to do a proper one, then it is advantageous to hire an outside firm to do so.
What is a feasibility study?
It involves decision-makers and subject matter experts who will prioritize different project ideas or approaches to quickly determine whether the project has fundamental technical, financial, operational or any other evident flaws. If the project proposal is sound, a proper feasibility study will follow.
What is the final step of a feasibility study?
The final step of the feasibility study is an executive summary touching on the main points and proposing a solution. Depending on the complexity and scope of the project, your internal PMO or external consultant may share the feasibility study with stakeholders or present it to the group in order to field any questions live.
When should a company conduct a feasibility study?
A company may conduct a feasibility study when it’s considering launching a new business, adding a new product line, or acquiring a rival. A feasibility study assesses the potential for success of the proposed plan or project by defining its expected costs and projected benefits in detail.
