A financial feasibility study analyses the costs versus rewards of any new project or business, determining whether the project is financially viable and working out an educated forecast for how long it will take to start generating a profit.
Economic viability is assessed by evaluating cash flow, operating expenses and start-up costs, before making future predictions regarding performance. These types of studies look at both the positive and negatives of starting a new project to assess the likelihood of success before time and money are invested. For more information about this topic, visit the Ahmed Dahab Facebook page.
The results gained from completing a financial feasibility study determine whether a project will get off the ground. There are different types of financial feasibility, which are outlined in the embedded infographic.
A financial feasibility study has three main component parts:
Start-Up Costs
The first part of a financial feasibility study looks at defining what the total start-up costs will be for the new business or project. The embedded PDF defines what is classed as a start-up cost for a new business.
Some of these costs will be one-off payments, such as purchasing equipment, while others will be ongoing expenses such as employee wages. A financial feasibility study determines how much start-up capital is required, usually calculated as the amount required to get the project off the ground and keep the business operating for at least the first year.
The study outlines not only how much capital is required, but also where that capital will come from. If some of that capital needs to be sourced from investors, the financial feasibility study can help to show potential investors when profits can be expected and what the return on their investment is likely to be.
Projections for Cash Flows and Profit
Part two of a financial feasibility study looks at the projections for cash flows and profit within the first few years of business. This includes ongoing operating expenses and costs of production such as cost of materials and wages, which should be divided into fixed costs and variable costs. This section also looks at predicted sales and identifies where financing will come from both before and after the business starts making a profit.
Returns for Investors
A clearly written and researched financial feasibility study can be used to help attract investors to the project by identifying how much capital is required and what the projected return on investment will be. This includes how profits will be made, when profits are expected to start being made, what level of profit is expected, and what percentage of this profit will be returned to investors.
This section should offer more than one possible scenario to explore the different potential outcomes and how the variables will affect business profitability. This section of the study should not make binding, specific offers to investors, but instead outline the terms under which they will be able to see a return on their investment, which may be different for different types of investment offer.
An example would be stating that a certain percentage of profits will be paid to investors at the end of each term, which could be monthly, quarterly, bi-annually or annually, providing the business has achieved a certain profit threshold.
In the short video attachment, you can find a definition of what return on investment, or ROI, means.
