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Chapter 3 Feasibility analysis(lecture 4 & 5)


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Chapter 3 Feasibility analysis(lecture 4 & 5)

  1. 1. 3-1 Chapter 3 Feasibility Analysis?
  2. 2. What Is Feasibility Analysis? 3-2 • Feasibility analysis is the process of determining whether a business idea is viable.
  3. 3. 3-3 A feasibility analysis helps you ………… •To assess the merit of your business idea, •Determine whether there is a market for your idea, •Whether the idea is financially viable, •and ultimately, whether or not it is worth investing your time and money into the venture, •Overall demand for new products, services, or ideas •Characteristics of likely customers (such as demographics and buying behavior) • Characteristics of likely competitors Benefits of Feasibility Analysis?
  4. 4. When To Conduct a Feasibility Analysis Timing of Feasibility Analysis The proper time to conduct a feasibility analysis is early in thinking through the prospects for a new business. The thought is to screen ideas before a lot of resources are spent on them 3-4
  5. 5. 3-5 It is estimated that only one in fifty business ideas are actually commercially viable. Therefore a business feasibility study is an effective way to safeguard against wastage of further investment The research and information uncovered in the feasibility study will support the business planning stage and reduce the research time. Hence the cost of the business plan will also be reduced Conti….
  6. 6. Components of a Feasibility Analysis 3-6 Product/Service Feasibility Organizational Feasibility Industry/Target Market Feasibility Financial Feasibility
  7. 7. Feasibility Analysis 3-7 Role of feasibility analysis in developing business ideas.
  8. 8. Outline for a Comprehensive Feasibility Analysis 3-8
  9. 9. Product/Service Feasibility Analysis 3-9 Components of product/service feasibility analysis Product/Service Desirability Product/Service Demand
  10. 10. 1.1- Product/Service Desirability 15-10 • Does it make sense? Is it something consumers will get excited about? • Does it take advantage of an environmental trend, solve a problem, or take advantage of a gap in the marketplace? • Is this a good time to introduce the product or service to the market? • Are there any fatal flaws in the product or service’s basic design or concept? First, ask the following questions to determine the basic appeal of the product or service.
  11. 11. 3-11 Second, Develop/Administer a Concept Test A concept statement should be developed. A concept statement is a one page description of a business, that is distributed to people who are asked to provide feedback on the potential of the business idea. The feedback will hopefully provide the entrepreneur  A sense of the viability or the product or service idea.  Suggestions for how the idea can be strengthened or “twisted” before proceeding further.
  12. 12. 3-12 Conti….. New Venture Fitness Drink’s Concept Statement
  13. 13. 1.2- Product/Service Demand Product/Service Demand Through primary and secondary research Step 1: Administer a Buying Intentions Survey, focus group etc Step 2: Conduct library, Internet research, used local data etc 3-13
  14. 14. 3-19 Gumshoe Research Explanation • A gumshoe is a detective or an investigator that scrounges around for information or clues wherever they can be found. • Be a gumshoe. Ask people what they think about your product or service idea. If your idea is to sell educational toys, spend a week volunteering at a day care center and watch how children interact with toys.
  15. 15. 2.0 Industry/Target Market Feasibility Analysis 3-21 Industry/Target Market Feasibility Analysis Purpose • Is an assessment of the overall appeal of the industry and the target market for the proposed business. • An industry is a group of firms producing a similar product or service. • A firm’s target market is the limited portion of the industry it plans to go after.
  16. 16. Industry/Target Market Feasibility Analysis 3-22 Components of industry/target market feasibility analysis Industry Attractiveness Target Market Attractiveness
  17. 17. 2.1. Assessing Industry Attractiveness porter five forces model
  18. 18. 2.2. Target Market Attractiveness Target Market Attractiveness The challenge in identifying an attractive target market is to find a market that’s large enough for the proposed business but is yet small enough to avoid attracting larger competitors. Assessing the attractiveness of a target market is tougher than an entire industry. 3-24
  19. 19. 3.0. Organizational Feasibility Analysis 3-25 Organizational Feasibility Analysis Purpose • Is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch a business. • Focuses on non-financial resources.
  20. 20. Organizational Feasibility Analysis 3-26 Components of organizational feasibility analysis Management Prowess Resource Sufficiency
  21. 21. 3.1. Management Prowess Management Prowess A firm should candidly evaluate the prowess, or ability, of its management team to satisfy itself that management has the requisite passion and expertise to launch the venture. Two of the most important factors in this area are:  The passion that the solo entrepreneur or the founding team has for the business idea.  The extent to which sole entrepreneur or the founding team understands the markets in which the firm will participate. 3-27
  22. 22. 3.2. Resource Sufficiency Resource Sufficiency An assessment of whether an entrepreneur has sufficient non financial resources to launch the proposed business. 3-28
  23. 23. Resource Sufficiency 3-29 Examples of nonfinancial resources that may be critical to the successful launch of a new business • Availability of factory/ lab space for business. • Local and state government support of the business. • Quality of the labor pool available. • Closeness to key suppliers and customers. • Willingness of high quality employees to join the firm. •Proximity to similar firms for the purpose of sharing knowledge. • Possibility of obtaining intellectual property protection in key areas.
  24. 24. 4.0. Financial Feasibility Analysis 3-30 Financial Feasibility Analysis Purpose • Is the final component of a comprehensive feasibility analysis. • A preliminary financial assessment is sufficient.
  25. 25. Financial Feasibility Analysis 3-31 Components of financial feasibility analysis Total Start-Up Cash Needed Financial Performance of Similar Businesses Overall Financial Attractiveness of the Proposed Venture
  26. 26. 4.1. Total Start-Up Cash Needed Total Start-Up Cash Needed The first issues refers to the the total cash needed to prepare the business to make its first sale. An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to generate the first $1 in revenues. The point of this exercise is to determine if the proposed venture is realistic given the total start-up cash needed. 3-32
  27. 27. 4.2. Financial Performance of Similar Businesses Financial Performance of Similar Businesses Estimate the proposed start-up’s financial performance by comparing it to similar, already established businesses. There are several ways to doing this, all of which involve a little ethical detective work.  First, there are many reports available, some for free and some that require a fee, offering detailed industry trend analysis and reports on thousands of individual firms.  Second, simple observational research may be needed. For example, the owners of New Venture Fitness Drinks could estimate their sales by tracking the number of people who patronize similar restaurants and estimating the average amount each customer spends. 3-33
  28. 28. 4.3. Overall Financial Attractiveness of the Proposed Venture Overall Financial Attractiveness of the Proposed Investment A number of other financial factors are associated with promising business startups. In the feasibility analysis stage, the extent to which a business opportunity is positive relative to each factor is based on an estimate rather than actual performance. The table on the next slide lists the factors that pertain to the overall attractiveness of the financial feasibility of the business idea. 3-34
  29. 29. Overall Financial Attractiveness of the Proposed Venture 3-35 Financial Factors Associated With Promising Business Opportunities • Steady and rapid growth in sales during the first 5 to 7 years in a clearly defined market niche. • High percentage of recurring revenue—meaning that once a firm wins a client, the client will provide recurring sources of revenue. • Ability to forecast income and expenses with a reasonable degree of certainty. • Internally generated funds to finance and sustain growth. • Availability of an exit opportunity for investors to convert equity to cash.
  30. 30. Types of businesses 3-36
  31. 31. 3-37 Sole Proprietorship The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietorships own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.
  32. 32. 3-38 Advantages of a Sole Proprietorship 1.Easiest and least expensive form of ownership to organize. 2. Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit. 3.Profits from the business flow-through directly to the owner’s personal tax return. 4.The business is easy to dissolve, if desired. Disadvantages of a Sole Proprietorship 1.Unlimited liability. Owners who organize their business as a sole proprietorship are personally responsible for the obligations of the business, including actions of any employee representing the business. 2.Limited life. In most cases, if a business owner dies, the business dies as well. 3.It may be difficult for an individual to raise capital. It's common for funding to be in the form of personal savings or personal loans
  33. 33. 3-39 Partnership A Partnership consists of two or more individuals in business together. Partnerships may be as small as mom and pop type operations, or as large as some of the big legal or accounting firms that may have dozens of partners
  34. 34. 3-40 Advantages 1.Synergy. There is clear potential for the enhancement of value resulting from two or more individuals combining strengths. 2.Partnerships are relatively easy to form, however, considerable thought should be put into developing a partnership agreement at the point of formation. 3.Partnerships may be subject to fewer regulations than corporations. 4.There is stronger potential of access to greater amounts of capital. 5.No corporate income taxes. Disadvantages 1.Unlimited liability. General partners are individually responsible for the obligations of the business, creating personal risk. 2.Limited life. A partnership may end upon the withdrawal or death of a partner. 3.There is a real possibility of disputes or conflicts between partners which could lead to dissolving the partnership. This scenario enforces the need of a partnership agreement.
  35. 35. 3-41 Corporation Corporations are probably the dominant form of business organization in the United States. Although fewer in number, corporations account for the lion's share of aggregate business receipts in the U.S. economy. A corporation is a legal entity doing business, and is distinct from the individuals within the entity. Public corporations are owned by shareholders who elect a board of directors to oversee primary responsibilities.
  36. 36. 3-42 Advantages Unlimited commercial life. The corporation is an entity of its own and does not dissolve when ownership changes. Greater flexibility in raising capital through the sale of stock. Ease of transferring ownership by selling stock. Limited liability. This limited liability is probably the biggest advantage to organizing as a corporation. Individual owners in corporations have limits on their personal liability. Even if a corporation is sued for billions of dollars, individual shareholder's liability is generally limited to the value of their own stock in the corporation..
  37. 37. 3-43 Disadvantages 1. Regulatory restrictions. Corporations are typically more closely monitored by governmental agencies, including federal, state, and local. Complying with regulations can be costly. 2. Higher organizational and operational costs. Corporations have to file articles of incorporation with the appropriate state authorities. These legal and clerical expenses, along with other recurring operational expenses, can contribute to budgetary challenges. 3. Double taxation. The possibility of double taxation arises when companies declare and pay taxes on the net income of the corporation, which they pay through their corporate income tax returns. If the corporation also pays out dividends to individual shareholders, those shareholders must declare that dividend income as personal income and pay taxes at the individual income tax rates. Thus, the possibility of double taxation.