Lecture 2_Feasibility Study vs Business Plan

8/13/2019 Lecture 2_Feasibility Study vs Business Plan

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Feasibility Study vs.

Business Plan


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There is nothing in the world as

powerful than an idea whose time has

come (Victor Hugo )


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Courage is the first of the human qualities because it is the

quality which guarantees all the others.

Winston Churchill

What would life be if we had no courage to attempt

anything?

Vincent Van Gogh

The greatest risk of all is the risk of riskless living.

Stephen R. Covey

This is the true joy in life: Being used for a purpose

recognized by yourself as a mighty one, being a force ofnature instead of a feverish, selfish little clod of ailments and

grievances, complaining that the world will not devote itself

to making you happy.

George Bernard Shaw


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What is a Feasibility

Study? A feasibility study provides an Investigating function

that helps answer Should we proceed with theproposed project idea? Is it a viable business

venture?

A feasibility study should be conducted to determinethe viability of an idea BEFORE proceeding with thedevelopment of a business.


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Levels of Feasibility

Assessment

A feasibility study of an idea is conducted at three

levels

Operational Feasibility

Will it work?

Technical Feasibility

Can it be built?

Economic Feasibility Will it make economic sense if it works and is built?

Will it generate PROFITS?


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Why do a Feasibility Study?

Provide a thorough examination of all issues andassessment of probability of business success

Give focus to the project and outline alternatives

Narrow business alternatives

Surface new opportunities through the investigative

process Identify reasons NOT to proceed

Enhance the probability of success by addressing andmitigating factors early on that could affect the project

Provide quality information for decision making

Help to increase investment in the company Provide documentation that the business venture wasthoroughly investigated

Help in securing funding from lending institutions andother monetary sources


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Steps for an Economic

Feasibility Study Identify and Estimate all Capital Expenditures Identify and Estimate all Variable Costs related to the

Proposed Business Venture

Identify People and Skills required to operate

Determine Wages, Salaries, and Benefits

Identify and Estimate Project Related Costs

Infrastructure development or improvements

Advertising and Promotion

Legal Fees Municipal & State Development taxes

Identify and Estimate all Fixed Costs


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Estimating Total Capital

Requirements

Assess the seed capital needs of the business project and

how these needs will be met

Estimate capital requirements for facilities, equipment and

inventories Replacement capital requirements and timing for facilities and

equipment

Estimate working capital needs

Estimate start-up capital needs until revenues are realized at

full capacity Estimate contingency capital needs (constructions delays,

technology malfunction, market access delays, etc.)

Estimate other capital needs


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Estimate Equity and Credit Needs

Identify alternative equity sources and capital

availability

Producers, Local Investors, Angel Investors, Venture Capitalists Identify and assess alternative credit sources

Banks, Government (direct loans or loan guarantees), Grants,

Local and State Economic Development Incentives

Assess expected financing needs and alternative

sources Interest Rates, Terms, Conditions, Covenants, Liens, Etc.

Debt to Equity Levels


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Utilize data collected to determine economic feasibility: Estimate Expected Costs and Revenue

Estimate the Profit Margin and Expected Net Profit

Estimate the sales or usage needed to break-even

Estimate the returns under various production, price

and sales levels to create a sensitivity analysis Assess the reliability of the underlying assumptions of

the financial analysis

Benchmark against industry averages and/orcompetitors

Identify limitations or constraints of the economicanalysis

Project expected cash flow during the start-up period

Project income statement, balance sheet whenreaching full operation


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A feasible business venture is one where

the business will generate adequate cash flow

and profits,

the business will withstand the risks it will

encounter,

the business will remain viable in the long-

term, and

the business will meet the goals of the

founders.

What Defines

Feasibility?


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What Next?

After the feasibility study has been completed andpresented to the leaders of the project, they shouldcarefully study and analyze the conclusions andunderlying assumptions

Next they will decide which course of action to pursue Potential Courses of action include

Choosing the most viable business model, developing abusiness plan and proceeding with creating and operating abusiness

Identifying additional scenarios for further study

Deciding that a viable business opportunity is not available andmoving to end the business assessment process

Following another course of action


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Developing aBusiness Plan


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What is a Business Plan?

A Business Plan summarizes the plan of actionafter a course of action has been determinedthrough the Feasibility Study

A Business Plan provides a Planning function A Business Plan outlines the actions needed totake the proposal from idea to reality

A Business Plan tells How your business will becreated and Why it will be successful

A Business Plan provides a road map forstrategic planning


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Why Write a Business

Plan? Put the Pieces TogetherDo the pieces fittogether in a logical manner?

Create a Blueprint for Action

Focus Founders and/or Management Team Obtain Financing

Attract Equity Investment

Attract Key Managers and Employees

Obtain Contracts

Create Joint Ventures, Mergers, Acquisitions


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Whats wrong with most business

plans?

Most waste too much ink on numbers and

devote too little to the information that

really matters to intelligent investors.

W.S. Sahlman How to write a great business plan, Harvard Business Review, July-August 1997


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The People Ideas are a dime a dozen most of the time, only execution skills counts

Questions to have in mind, when you craft this part of the business plan: Where are the founders from?;

Where have they been educated?;

Where have they worked and for whom?;

What have they accomplished professionally and personally in thepast?;

What is their reputation within the business community?;

What experience do they have that is directly relevant to the opportunitythey are pursuing?;

What skills, abilities and knowledge do they have?;

How realistic are they about the ventures chance for success and thetribulations it will face?;

Who else need to be on the team?;

Are they prepared to recruit high-quality people?;

How will they respond to adversity? Do they have the determination to make the inevitable hard choices that

have to be made?;

How committed are they to this venture?;

What are their motivations?


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The Opportunity

Investors are looking for businesses in whichmanagement can buy low, sell high, collect earlyand pay lateif its possible!

The venture should be set up in an industry thatis large and/or growing, and thats structurallyattractive.

The business plan have to prove theeconomically viable access to customers.

The list of questions about the new venturesopportunity focuses on the direct revenues andthe cost of producing and marketing a product.


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The Opportunity

Questions to have in mind, when you craft this part of thebusiness plan: Who is the new ventures customer?

How does the customer make decisions about buying thisproduct or service?

To what degree is the product or service a compelling purchasefor the customer?

How will the product or service be priced?

How will the venture reach all identified customer segments?

How much does it cost to produce and deliver the product orservice?

How much does it cost to support a customer? How easy is it to retain a customer?


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The Opportunity Other questions an investor will have in mind about the

business opportunity: When does the business have to buy resources, such as supplies, raw

materials and people?

When does the business have to pay for them?

How long does it takes to acquire a customer?

How long before the customer pays?

How much capital equipment is required to support a dollar of sales?

Who are the new ventures current competitors?

What resources do they control? What are their strengths andweaknesses?

How will they respond to the new ventures decision to enter thebusiness?

How can the new venture respond to its competitors response?

Who else might be able to observe and exploit the same opportunity?

Are there ways to co-opt potential or actual competitors by formingalliances?


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The Context

Macroeconomic environment:

Level of economic activity;

Inflation;

Exchange rates; Interest rates.

Government rules and regulations:

Tax policy;

Monetary policy through Central Bank.


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The Context

Business plan should: include a presentation of new ventures context and

how it helps or hinders the proposal;

describe how the inevitable changes in the context

affect the business; point out what management can (and will) do in the

event the context grows unfavorable;

explain the ways (if any) in which management can

affect context in a positive way (management mightbe able to have an impact on regulations or industry

standards through lobbying efforts).


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Risk and Reward

A business plan is a snapshot of an event in the

future (a picture of the unknown).

A business plan should present people,opportunity and context as a moving target,

focusing attention on the dynamic aspects of

the entrepreneurial process.

A business plan have to point out and assesthe risks and rewards for investors.


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Risk and Reward

A business plan should point out that there is a

back up plan, in case things go wrong.

There are no immutable distribution ofoutcomes, therefore the responsibility of the

management is to change the distribution of

these, by increasing the likelihood and

consequences of success, and by decreasing

the likelihood and implications of problems.


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Risk and Reward

How this success story will end?

How can the investors take their money out of the

business? Can the company be taken public at some

point in the future?

From whom you raise capital is often more important

than the terms.

Unsophisticated investors panic easily when things are

going wrong and often refuse to advance the company more

money; Sophisticated investors, usually when things go wrong roll

up their sleeves and help the company solve its problems.


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A Business Plan must demonstrate

mastery of the entire entrepreneurialprocess, from identification of opportunity

to harvest.


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Classical structure

of a Business Plan

Executive summary

Product or service

Management team

Market and competit ion

Marketing and sales

Business system and organization

Implementation schedule

Opportunities and risks

Financial planning and financing


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Feasibility Study vs.

Business Plan Feasibility study answers the bottom line questionIs thisventure going to make money?

Feasibility study outlines and analyzes severalalternatives or methods of achieving business success

Feasibility study is conducted before a business plan

Business plan is prepared only after the venture has beendeemed to be feasible

Business plan deals with only one alternative or scenariothat is determined to be the best alternative

Business plan considers the management sidegoalsand objectives of the planned business venture


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A funny glossary of business plan terms

What they say. And what they really mean..

We took our best guess and

divided by 2.

We accidentally divided by 0.5

We project a 10% margin.. We did not modify any of the assumptionsin the business plan template that we

downloaded from the Internet

The project is 98% complete To complete the remaining 2% will take as

log as it took to create the initial 98% but

will cost twice as much.

We only need a 10% marketshare

So do the other 50 entrants getting funded

Customers are claming for our

product

We have not yet asked them to pay for it.

Also, all of our current customers are

relatives.


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A funny glossary of business plan

terms

What they say. And what they really

mean..

We are the low-cost producer We have not produced anything yet, but

we are confident that will be able to

We seek a value-added investor.. We are looking for a passive, dump-as-

rocks investor.

If you invest on our terms, you will

earn a 68% internal rate of return..

If everything that could ever conceivably

go right does right, you might get your

money back.

Our management team has a

great deal of experience.Consuming the product or service.

A selected group of investors is

considering the plan

We mailed a copy of the plan to everyone

in Pratts Guide.

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Lecture 2_Feasibility Study vs Business Plan

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