Conducting a feasibility study is a critical first step when starting a new business or expanding an existing one. The reason is that a feasibility study helps assess the viability of a business idea. Without one, professionals cannot make informed decisions regarding a new project or venture.

To implement a successful feasibility study for a business, it is necessary to understand its various components and how to prepare them. In this guide, we’ll provide a detailed layout of how to do a feasibility study for a business, examining key constituents and the process involved.

What is a Feasibility Study?

A feasibility study is an assessment of a proposed business idea or project. It systematically evaluates business components based on practicality, sustainability, and profitability. The goal is to determine whether the project or idea is technically, financially, and organizationally feasible. In other words, a feasibility study asks: “Is this project viable, and is it worth pursuing?”

A well-executed feasibility study reduces the risk of failure by identifying potential obstacles before committing significant resources. This allows a company to develop solutions to these challenges and plan an appropriate strategy. By providing a comprehensive analysis of the project’s potential outcomes, a feasibility study for a business guides professionals toward better decision-making.

Types of a Feasibility Study for a Business

Generally speaking, there are five main types of a feasibility study. They are:

1. Market Feasibility
2. Technical Feasibility
3. Financial Feasibility
4. Legal Feasibility
5. Organizational Feasibility

1. Market Feasibility

As the name suggests, a market feasibility study determines whether a project will gain market success. It assesses the demand for a product or service, the target audience, potential competition, and market trends. A thorough market analysis will help a business determine whether its idea is needed and how to position itself in the market.

2. Technical Feasibility

Technical feasibility determines whether a project is technically achievable; does the company possess the resources and expertise for the project’s requirements? This includes production capacity, raw materials, supply chains, etc. A comprehensive technical feasibility study will also include requirements for regulatory compliance.

3. Financial Feasibility

Financial feasibility evaluates the financial aspects of a business project, including the cost of starting and running the business, potential revenue, profitability, and the project’s break-even point. A financial feasibility study for a business helps determine whether it will generate enough income to cover its expenses and provide a satisfactory return on investment (ROI).

4. Legal Feasibility

A legal feasibility study ensures a business complies with all relevant laws and regulations. It involves analyzing the legal requirements for all activities and deliverables that fall under the project’s scope. Moreover, a legal feasibility study helps a business select an appropriate legal structure. Every legal structure has its benefits and disadvantages such as limited liability corporations (LLCs), which reduce liability for business partners.

5. Organizational Feasibility

An organizational feasibility study assesses the capability of a business to manage a project. It focuses on the internal structure, management, and personnel needed to execute a business plan. An organizational feasibility study may also include insights into the ethics of the business, demonstrating to stakeholders the business’s trustworthiness and level of responsibility.

Steps to Conduct a Feasibility Study for a Business

The steps on how to do a feasibility study for a business can be broken down into 7.

Step 1: Conduct Preliminary Research

A feasibility study begins by gathering information about the market, competition, and industry trends. This helps identify potential opportunities and challenges. Preliminary research aims to screen project ideas before excessive time and resources have been spent on them.

Step 2: Establish a Project Income Statement

A project income statement determines the revenue necessary to cover direct and indirect costs, accounting for expected income growth. Once an amount has been calculated, sources for funding can be established.

Step 3: Analyze the Market

A feasibility study for a business must assess the demand for the new product or service. This assessment is based on market trends, customer preferences, and competitor performance. Surveys, interviews, and focus groups are all used to gather insights into the targeted customer base, and subsequently determine opportunities for market expansion.

Step 4: Prepare Organisation and Operations

Once a foundation has been built for the project, work must begin organizing operations and costs. This includes a thorough breakdown of start-up costs, investments, and operational expenses. Everything from equipment to overhead costs must be accounted for.

Step 5: Produce an Opening Day Balance Sheet

An opening day balance sheet estimates the project’s assets and liabilities. Begin by preparing a list of all necessary assets. Assets may range from working capital to land and buildings. Similarly, liabilities like leasing or purchasing land, buildings, equipment, and financing accounts receivable must be considered. Though a list may seem straightforward, compiling it can be detailed, requiring careful consideration of all financial aspects.

Step 6: Review Data

Reviewing data is essential. Re-examine the projected income statement and see whether it reflects realistic expectations, considering all expenses and liabilities. Identify risks and consider contingencies, anticipating potential market changes that could impact projections. A final review is crucial for confirming that everything aligns and whether adjustments need to be made.

Step 7: Make a Final Decision

After a feasibility study for a business has been completed, all findings must be reviewed and a final decision must be made.  The project may be put on hold if significant risks or challenges are present. In that case, alternative solutions or revisions can be considered. If the final review reveals that the project fails to meet long-term goals, the project may be abandoned completely. However, if the project meets all requirements, the project can be put into production.

Conclusion

In conclusion, learning how to do a feasibility study for a business is an essential tool for assessing viability and potential success. Whether a business is launching a new venture or expanding an existing one, a well-executed feasibility study provides the clarity needed to proceed confidently. Remember, this process not only highlights the potential of an idea but also helps identify challenges early on, allowing you to plan strategically and increase your chances of success.