Project Feasibility Study

 The importance of a project feasibility study is to determine the viability of the business. Will it be workable? Will the business surviv...

 The importance of a project feasibility study is to determine the viability of the business. Will it be workable? Will the business survive all the difficulties that will be encountered?
 A would-be entrepreneur should consider whether he is capable of managing the business, produce the product without difficulty, sell the product for satisfaction and earn more or less a reasonable profit.
 A project feasibility study is a written document that gives an authoritative information whether project is technically feasible and economically viable. The data and facts presented in this study will be the basis on how the project or business is going to be pursued. The information includes the components of marketing, production, organization, and financing. it is a requirement in securing loans from bank. It is also used for promoting the project to prospective partners or stockholders. The bank or investors usually appraise and evaluate this feasibility study before extending a loan.



Components of a Project Feasibility study
1. Marketing study. This component determines the following:
  a. Is there a market available for the project?
  b. Will there be a fast turnover for the projects?
  c. What is the process or method of selling the product?
2. Production or technical aspect. This aspect is concerned with the manufacturing process.
  a. The kind of products to be produced
  b. The quantity that will be produced
  c. The process or procedure of producing the product
  d. The cost or expenses of providing the product
 3. The Study of organization or management. This feasibility aspect involves the form of organization for the business, the number of people needed to execute in the production, and the target date when to start the operation of the business.
4. Financing study. This study concerns the finances needed for the business to start.
  a. The needed capital for the business
  b. The source of the capital
  c. The financial outcome of the project
  d. The financial strength, safety and work-ability of the project

I. The Market Study
 A market study should give answers on the following:

1. What product will the business sell?
2. Is the product sale-able?
3. Is it of quality
4. What strategies should be used or applied to sell the product?

  It should be clear that the entrepreneur knows the product that is going to be manufactured very well. He has a background or detailed knowledge of how to make the product. Beforehand, he already has the idea as to who will be the buyers and the suppliers of the materials. If he has not identified the source of materials, will there be a sufficient supply during the process of production? This study should also take into consideration the marketing practices of competitors.

Forecasting the Demand and Supply- It is always proper to analyze and forecast the demand and supply of the products in the market in order to determine if existing trends will continue in the future. The purpose of forecasting the market is to serve as a reference for estimating what will be the gains of the business in the market.

There are statistical projection methods for application in forecasting,

They are:

1. Arithmetic straight line- It says that the annual volume of increase is constant. This is done by subtracting the values of the earliest and latest years and dividing the difference by the total number of years minus one. After this, the annual volume of increase is added to the value of the latest year to determine the value projected for the succeeding year.
For example:

Year	Value
1995 1996 1997 1998 1999 2000	30,000 50,000 60,000 40,000 65,000 75,000

Difference between 2000 and 1995 : 75,000 - 30,000 = 45,000
Annual increase from 1995 to 2000: 45,000 divided by (6-1) = 9,000

 From this computed annual increase, the projections for the following years will likely be:

2001	70,000 + 9,000 =79,000
2002	79,000 + 9,000 = 88,000
2003	88,000 + 9,000 = 97,000
2004	97,000 + 9,000 = 106,000

2. Arithmetical geometric curve. It says that the annual rate of increase is constant. This annual rate of increase is used to project the values. From the same sample, projection values will likely be:

Year	Value (V)	Increase (Decrease)	% Increase (Decrease)
1995	30,000	-	-
1996	50,000	20,000	80
1997	60,000	10,000	22
1998	40,000	-20,000	-36
1999	65,000	25,000	71
2000	75,000	10,000	17
		Total	154

The annual rate of increase is 154 divided (6-1) = 30.8 or 31 percent. The projected values will therefore be:

2001	75,000 + 75.00 (31%) = 70,000 = 98.250
2002	98,250 x 1.31= 128,601
2003	128,708 x 1.31 = 168,601
2004	168,601 x 1.31 = 220,875

From the computed projected values above, the entrepreneur will then make an estimate of how many and how much the business can sell. They can now sell the products based on the computed market share, how big is the expected market, and produce volume of products after determining the number of units from the computation.

Preparing a Market Plan- The entrepreneur will now formulate the marketing plan in order to achieve the scale target after forecasting the sales. The marketing plan should have the following contents:

1. Target market. This target will pinpoint the prospective buyers of the product.
2. Product. This should give the characteristics of the product preferably its advantage over the other products.
3. Price. This should determine at what price the product should be sold. The price should be based on the prevailing or competitors' selling price or on the computed product cost.
4. Promotion. The entrepreneur will propose a method of informing the buyers regarding the product and make initiative to convince them to buy.
5. Place. The product may be sold direct to the target market or indirectly using people who are wholesalers, retailers, or distributors.
6. Marketing budget. The amount of money here will be spent for the advertisement and sales.

II. The Technical Study

  This study has the purpose of determining if the product could be produced at the targeted volume, quality, and cost. It presents the estimated cost of production.

  There are steps required in the preparation of the technical study and they are the following:
1. Provide specifications of the product to be produced. This step should give in detail its features, characteristics, dimensions and other excellent qualities based on the specification given by the target market.
2. Estimate number of products to be produced. The entrepreneur prepares a production schedule on the bulletin board indicating the dates and time of the estimated number of products to be manufactured. Along with this preparation, there should be a record of the market demand and provisions for inventory. An example is give here: 

Project sales volume-	80,000
Add Expected inventory end-	+ 10,000
Total volume, available for sale-	90,000
Less: Inventory beginning-	-5,000
Total volume to be produced-	85,000

3. Determine how to produce. The would-be entrepreneur must determine how to manufacture products of good quality at the least expense. The method of production may made manually, semi-mechanized, or mechanized. Will it be through division of labor?
4. Determine the nature, volume, and cost of the inputs needed to produce the product. The would-be entrepreneur should make an analysis of the inputs required to produce. This is done by computing the estimated cost of production of each product. He should compute the total cost of materials, labor, power, and other miscellaneous expenses that go into the product that is produced. He should see to it that during the process of production, the availability, the sourcing, and the quality of the inputs are not interrupted.
5. Determine the fixed capital investment required. The would-be entrepreneur must determine the fixed capital that should be prepared for the land, building, machinery, and equipment in order to produce the product. He should also identify the source of the materials and estimate the volume and costy of each product.
6. Decide on business location. The best decision on the choice of business location is to take into consideration the following:
a. The area population that will patronize or buy the product
b. The nearness of the location to the source of the materials
c. The availability and cost of the land
d. The nearness of the location to the sources of inputs and markets
e. The peace and order in the place

7. Estimate the cost of production. The would-be entrepreneur should make an estimate of the cost to produce the product based on the volume to be produced. The formula for estimating the cost of production is given here:
Cost of production = direct materials + direct labor + production overhead

 Production overhead is composed of the indirect materials, depreciation, utilities, transportation, repair, and maintenance  indirect labor, and others.

8. Estimate the fixed capital investment. You can get this by adding the cost of the fixed capital to be required, thus
Fixed capital investment = costs of land + building + machinery + equipment

Land	=	800,000.00
Building	=	600,000.00
Machinery and equipment	=	200,000.00
Total fixed capital	=	P 1,600,000.00

III. The Organizational Study
 It is also called management study because this is the part of the feasibility study that deals mostly with managing the business. This is where you are going to choose the appropriate form of business organization. In this study also, the would be entrepreneur determines the manpower requirement and when to start the normal operation of the business.

Choosing the Appropriate Form of Business Organization. The would-be entrepreneur should be guided with things to consider when choosing the right form of business organization. They are:

1. Does he want to get all the profit for himself or share it with other persons?
2. Does he want the business to operate beyond his term or not?
3. Does he plan to have a bigger capital or be contented for the amount he can only afford?
4. Does he want the business to have a separate legal identity or not?

  In a single proprietorship or partnership form of business organization, the business operation will stop when the owner or partners die or when the partners agree to terminate the business. A corporation has separate legal identity and continues to exist even if the ownership changes or stocks are transferred to other stockholders  The amount of capital is limited for a single proprietorship or partnership, while a corporation has a bigger capital base from stockholders interested to invest in the business.

 Business Operations. In order that the business will operate efficiently, all the functions of marketing, production, administration, and finance should be manned and managed by educationally qualified personnel. the personnel should be properly screened and with experience that will make them highly qualified to handle these important and sensitive positions.
  A personnel plantilla which indicate the type of skills needed, the number of workers needed for the different skills, and corresponding salary rate is very important. A plantilla may be made similar to this:

Personnel Plantilla
Function	Designation	Number	Salary Rate
Marketing	Sales Manager Salesmen	1 2	P 15,000 monthly    11,000 each month
Production	Supervisors Workers	2 10	13,000 each month      9,000 each month
Administrative	Personnel Officer Secretary	1 1	14,000
Finance	Accountant Bookkeeper	1 1	13,000    12,000

IV. Financial Study
 This study pertains to the needed capital of the business, the source of the capital, the determination of the business if it is profitable and viable, and the preparation of financial study.
 Preparing the Financial Study. In preparing the financial study, the needed capital to start the business in order to make it operational and the source of the capital is given. Aside from these, information on how the business will perform financially will be explained including the system of earning profit and how the business will be meeting the financial obligations. There are also provisions about how the projected financial performances will become satisfactory and acceptable.
 Estimating the Total Cost of the Project. Estimating the total cost of the project should include the information how the money for acquiring the fixed capital to start the project will be given. This will also explain how the working capital will sustain its early period of operations and the amount for pre-operating requirements. Thus, the formula will be:

 Total project cost = fixed capital + working capital + pre-operating capital

 The fixed capital is used to acquire the fixed assets or resources like land, building, machinery, and equipment which will be used by the business over a long period of time. This had been estimated in the technical study part of this feasibility study.
 The working capital refers to what the business needs to operate continuously especially during its starting period when it is not making enough sales to finance the daily capital requirements.
 The pre-operating capital refers to what the would-be entrepreneur will spend during the organizational and pre-operating requirements.

Sourcing the Capital. This is what the would-be entrepreneur should do, the raising of the needed amount for the capital of the business from his savings or equity or borrow money which should be equal to the total project cost, thus,

 Total project cost = equity + loan

The loan is subject to interest charges and a repayment is to be made. A collateral has to be offered by the would-be entrepreneur when required by the bank in securing a loan.

Projecting the Financial Performance. The would-be entrepreneur should also prepare a projected financial statement on the business in order to determine if the business will earn profit and have sufficient money from the operations to finance all its requirements. The financial statements should include the following items:

1. Projected profit and loss or income statement
2. Projected balance sheet
3. Projected cash flow

 So that the profit and loss statement (P & L statement) will be clearly understood, it must show what the business earned from the sales, expenses on producing and selling its product including administration expenses, and what is left as profit or loss after deducting expenses from sales. An example of a profit and loss statement is shown here:

Profit and Loss Statement

For the month ending (month, date, year)

Sales                                                                           P ________

    Less: cost of goods sold              P ________

Gross profit                                                                    ________

    Less: Administrative and 

     selling expenses                         P ________

Operating profit                                                              ________

   Less: interest expense                  P ________

Net profit before tax                                                       ________

   Less: tax                                     P ________

Net profit                                                                       ________

  The cash flow is the amount of cash received by the business and the operation expenses and other financial expenses or obligations. This will show how much is left or how much is the deficit. The format of cash flow is hereby given:

Cash Flow

   Cash Receipts                Pre-operating                Year 1            Year 2

    (cash in flow)                      period                           

Equity                                 _________                 _______

Loan                                   _________                 _______

Cash sales                                                              _______            _______

Collection and receivables                                                                _______

Total cash receipts or flow  _________                  _______           ________

 Cash Disbursement           Pre-operating                Year 1              Year 2
   (cash outflow)                      period
Fixed asset acquisition          __________
Pre-operating expense          __________
Purchase of materials                                              _______           ________
Direct labor                                                            _______           ________
Overhead minus depreciation                                  _______           ________
Administrative and selling expenses minus                _______           ________
   amortization of pre-operating expenses
Account payable                                                                              ________
Total cash disbursement or  __________               _______            ________
    outflow
Net cash inflow (outflow)    __________               _______            ________
Add, cash balance beginning__________              _______            ________
Cash available for debt service _______                _______            ________
Less: Principal repayment                                       _______            ________
Interest                                                                  _______            ________
Cash balance ending          ___________              _______            ________

  Another financial statement which shows the financial position of the business is the balance sheet. It explains what the business uses in its operation in terms of assets and where these assets come from, that is, from liabilities and capital. A balance sheet is shown here:  

Balance Sheet

Asset

Current Assets                           Pre-operating             Year 1            Year 2

                                                       Period

    Cash                                        _________             ______           ______

    Accounts receivables                _________             ______           ______

    Inventors                                 _________              ______           ______

Total current assets                      _________             ______            ______

  Fixed Assets                            Pre-operating             Year 1            Year 2

                                                      Period

     Land                                      _________             ______            ______

     Building                                  _________             ______            ______

     Machinery and                       _________             ______            ______

          equipment

     Office furniture and                _________             ______             ______

          fixtures

  Total fixed assets                      _________             ______             ______

         Less accumulated              _________             ______             ______

         depreciation

  Total fixed assets                     _________              ______             ______

  Pre-operating capital                _________             ______             ______

 Total assets                              _________             _______            ______

Liabilities and Capital

Liabilities                                 Pre-operating              Year 1             Year 2

                                                   Period

 Current liabilities

     Accounts payable                _________                  ________        ________

     Loans payable                     _________                  ________        ________

  Total current liabilities             _________                  ________        ________

  Long term loans                      _________                 ________        ________

  

  Total liabilities                        _________                  ________        ________

  Capital

  Owner's capital                      _________                  ________       _________

  Retained earnings                   _________                  ________       _________

  

  Total capital                           _________                  ________       _________

  Total liabilities and capital      __________                 ________       _________

  The would-be entrepreneur should examine and analyze the projected financial statements and convert them into financial ratio. These financial rates may be realized in business with respect to profitability and liquidity. They are interpreted as:

                                                   

1. return of investment =                     Net profit

                                   total assets or total project cost

  This will show the amount of profit or return generated per peso invested.

2. Current ratio =  current assets  or

                           current liabilities

                  cash + account receivable + inventories

                                   current assets

                           

  This will indicate the capability of the business to pay its current financial obligations. The best ratio is 2 is to 1; that is, for every peso short-term loan, there should be 2 pesos worth of cash, receivables, and inventories to cover the loan.

3. Acid test ratio =  cash + account receivables

                                     current liabilities

  The best acid test ratio is 1 is to 1.