How Feasible is Your Business Venture?
As I mentioned in my last blog I teach a couple of NC REAL classes a year. One of the bankers that helps us always tells our classes on the night he does his Q&A about the best business plan he ever reviewed (and he’s seen a bunch). The best plan he ever reviewed was for a Worm Farm. He tells the class how beautifully written it was, how well it was organized, and how professionally it was published. Students invariably ask if the entrepreneur got the loan. The banker’s response is always a surprise, “No, I turned him down because it was not feasible. It never would have worked.” I believe that our students benefit greatly from this insight. No matter how well your plan is written or how well you describe your venture if you cannot convince your lenders or investors that your concept is feasible you will experience rejection.
A feasibility study is perhaps the most important step in the early stages of your business formation. The feasibility study can help identify the components that must be in place for your business to succeed. A feasibility study should begin with the entrepreneur conducting a thorough introspection. We have an inventory that we ask our NC REAL participants to complete titled, “Am I Entrepreneurial Material?” The purpose of this exercise is to assess participants’ entrepreneurial aptitudes, to identify the traits and experiences common to successful entrepreneurs, and to acknowledge the value and limitations of assessment tools. We want our participant to recognize that successful entrepreneurs come in all shapes and sizes. This inventory was designed to give participants an idea of how they measure up to the factors experts think are most important. We emphasize that the profile is one indicator of their readiness to start a business, but it cannot predict success.
Once the prospective entrepreneur has developed a better understanding of their personal inventory of the skills and traits they possess (or lack) to be a business owner they are ready to proceed with the feasibility study. The components of a feasibility study include:
· Description of the Business: What products or services will be offered and how they will be delivered?
· Market Feasibility: What industry is the business in? What are the characteristics of the industry? How would you characterize the current market, anticipated future market potential, competition, sales projections, potential buyers, etc. of your business?
· Technical Feasibility: How will you deliver a product or service (i.e., materials, labor, transportation, where your business will be located, technology needed, etc.)?
· Financial Feasibility: How much start-up capital will you need? What are the sources of capital, returns on investment, etc.?
Some entrepreneurs use a S.W.O.T. analysis to answer some of the above questions and to find potential obstacles and opportunities for their venture. S.W.O.T.—strengths, weaknesses, opportunities, and threats—is an extremely useful tool, for both a feasibility study and business plan development. The purpose of S.W.O.T. is to practice a systematic process of analysis, to assess the feasibility of a business idea, and to develop plans of action based on the analysis conducted. For example, when conducting the market feasibility component of the study you may find that one of the weaknesses that you identified in your S.W.O.T. analysis is a strength for one of your competitors. If this is the case then the changes to your marketing strategy to address this weakness may determine the success or failure of your venture.
The S.W.O.T. analysis is one framework that can be used by an entrepreneur. Another tool that is particularly useful when conducting the financial feasibility component of the study is breakeven analysis. A breakeven analysis should be completed near the end of your study. This tool requires an in-depth understanding of the industry and market. For example, if you don’t have accurate pricing and cost data for your analysis the end result will be meaningless. Pricing requires a good understanding of the demographics of your market, the price threshold for your customers, and competition. In addition, if start-up capital is required the cost and accessibility of these funds must be accurate. Other details such as business locations and their associated costs must be know or estimated. You should be able to defend every cost or revenue item in the analysis. If utilities listed are listed at $300 per month this figure should be based on research. What utility charges do similar businesses in your area incur? Utility companies can also be a good resource.
The more novel the concept of your venture the more in-depth your feasibility study needs to be. It may be necessary to use sophisticated forecasting techniques, simulations, test marketing, etc. The most complicated business concept that I have seen through NC REAL was a medical lab that specialized in DNA testing and research. Due to the complexity of the business it will be several years before the lab is launched. On the other hand if your business is similar to other businesses in your area your study will be much less involved.
The end result of a feasibility study is often a decision not to proceed with the venture. This result is perfectly acceptable. It is far better to realize that you are not prepared to launch a successful business than to launch and fail after losing valuable time and money. A feasibility study will never guarantee success—every new venture entails a certain amount of risk—but it can be a crucial step in taking your business from concept to reality.
