Developing any new business venture is difficult. Taking a project from the initial idea through the operational stage is a complex and time-consuming effort. Most ideas, whether from a cooperative or an investor owned business, do not develop into business operations. If these ideas make it to the operational stage, most fail within the first six months. Before the potential members invest in a proposed business project, they must determine if it can be economically viable and then decide if investment advantages outweigh the risks involved.
What is a Feasibility Study?
This analytical tool used during the project planning process shows how a business would operate under a set of assumptions — the technology used (the facilities, equipment, production process, etc.) and the financial aspects (capital needs, volume, cost of goods, wages etc.). The study is the first time in a project development process that the pieces are assembled to see if they perform together to create a technical and economically feasible concept. The study also shows the sensitivity of the business to changes in these basic assumptions.
Feasibility studies contain standard technical and financial components. The exact appearance of each study varies depending on:
- Industry Studied
- Critical Factors of Project
- Methods Used to Conduct Study
Emphasis can be placed on various sections of an individual feasibility study depending upon the needs of the group for whom the study was prepared. Most studies have multiple potential uses, so they must be designed to serve everyone's needs.
The feasibility study evaluates the project's potential for success. The perceived objectivity of the evaluation is an important factor in the credibility placed on the study by potential investors and financiers. Also, the creation of the study requires a strong background both in the financial and technical aspects of the project. For these reasons, outside consultants conduct most studies.
Farmstead First, LLC owners, Krista Dittman and Charuth Loth discuss the feasibility of starting your own business.
Do I Need a Feasibility Study?
- Feasibility studies for a cooperative are similar to those for other businesses, with one exception: Cooperative members use it to be successful in enhancing their personal businesses, so a study conducted for a cooperative must address how the project will impact members as individuals in addition to how it will affect the cooperative as a whole.
- Many cooperative business projects are quite expensive to conduct. The projects involve operations that differ from those of the members' individual business. Often, cooperative businesses' operations involve risks with which the members are unfamiliar. The study allows groups to preview potential project outcomes and to decide if they should continue. Although the costs of conducting a study may seem high, they are relatively minor when compared with the total project cost. The small initial expenditure on a feasibility study can help to protect larger capital investments later.
- Feasibility studies are useful and valid for many kinds of projects. Evaluation of a new business venture, both from new groups and established businesses, is the most common, but not the only usage. Studies can help groups decide to expand existing services, build or remodel facilities, change methods of operation, add new products, or even merge with another business. A feasibility study assists decision makers whenever they need to consider alternative development opportunities.
- Feasibility studies permit planners to outline their ideas on paper before implementing them. This can reveal errors in project design before their implementation negatively affects the project. Applying the lessons gained from a feasibility study can significantly lower the project costs. The study presents the risks and returns associated with the project so the prospective members can evaluate them.
- There is no "magic number" or correct rate of return a project needs to obtain before a group decides to proceed. The acceptable level of return and appropriate risk rate will vary for individual members depending on their personal situation.
- Cooperatives serve the needs and enhance the economic returns of their members, and not outside investors, so the appropriate economic rate of return for a cooperative project may be lower than those required by projects of investor-owned firms. Potential members should evaluate the returns of a cooperative project to see how it would affect the returns of all of their business operations.
- The proposed project usually requires both risk capital from members and debt capital from banks and other financiers to become operational. Lenders typically require an objective evaluation of a project prior to investing. A feasibility study conducted by someone without a vested interest in the project outcome can provide this assessment.
Feasibility Study Limitations
Although the feasibility study is a useful tool for project deliberation, it has limitations. There are several purposes for which a study should be applied but always purposes for which a study cannot or should not be applied. (Studies with both positive and negative conclusions can assist a group's decisions.)
Feasibility Studies Should:
- Evaluate specific projects.
- Consist of generic market information.
- Be tailored for the specific project.
- Analyze basic project assumptions.
- Show how results vary when assumptions change.
- Provide guidance to critical elements of a project.
- Permit a group to make better decisions about strategic issues of project.
- Present the intended responses to raised critical issues with results forming the basis for developing the business plan.
- Have assumptions/ideas identified before starting that are closer to the "real world" to give the study more value.
- Be an objective evaluation of a project's chance for success.
- Enhance a banker's ability to evaluate a project for possible financial aid
Feasibility Studies Should Not:
- Be an academic or research paper.
- Be a business plan developed later in the project development process that functions as a blue print for business operations.
- Be intended to identify new ideas or concepts for a project.
- Be conducted as a forum merely to support a desire for a project to be successful
- Be used only to recieve a financial loan. (primary goal should be to aid group's decisions)
A study will not determine if it is advisable to initiate a project, but the study results should assist them. The potential members have to decide if the economic returns justify the risks involved in their continuing the project.
Adapted from USDA-RD Feasibility study guide, SR-58