Look before you leap, with a business feasibility analysis

A thorough business feasibility analysis can determine whether the commitment of time, money and effort to your business idea is justified.The high failure rate of new business ventures is familiar. Typically less than one third of all new businesses survive beyond a year or two. It is also true, that less than 1 in 50 of business ideas are actually commercially viable.

The work of a business feasibility analysis is to assemble supporting evidence for its conclusions. As such, the research data and additional descriptive information will be the backbone and substance of any analysis report.

If a project looks feasible, the next step is to prepare a business plan. The research and information gathered for the feasibility analysis will form a useful and significant part of the business plan content, and so overlaps the preparation time.

A business feasibility analysis determines whether a venture has the three necessary success factors, the "three Ms":

1. Market: There is a market of enough willing customers who will pay enough for you to make sufficient profit.
2. Management: You and your team have the management skills and experience to manage the business profitably.
3. Money: The business has access to enough finance on adequate terms (debt, equity or both).

A “Yes” answer to each of these requirements (with documented supporting evidence) will satisfy the core requirements of a business plan. It will also anticipate and answer questions in the minds of financiers or investors.

BUSINESS FEASIBILITY ANALYSIS GUIDE - A CHECKLIST

Step by step, the following list (not exhaustive), will make up a business feasibility analysis:

1. Review and document your personal objectives, skills, experience and personal financial resources
2. Describe your product or service
3. Describe your customers - who are they?, what is their demographic range - increasing or decreasing?, how many are there?, when will they buy?, where are they?
4. Describe the competition - who are they?, where are they?, what are the trends?, what are their strengths and weaknesses?, what are the market barriers?
5. Describe your sales and distribution process in detail, from the start of sales generation, to the distribution methods and facilities required
6. Describe the management requirements, and what hours and skills will be required to supply what the business needs. Analyze successful competitors to determine the top-ranking skills requirements for the industry.
7. Sales forecast - on the basis of objective evidence (not opinion or guesswork), describe the price and expected volume of sales for at least 12 months, the uniqueness of your offering, the relationship with competitors and overall market size (e.g. do you need to steal market share - if so, how?), impact of seasons, fashion, competitors' likely response to your presence in the market, and comparisons of your forecasts to industry benchmarks
8. Compile a list of start-up and on-going expenditure, including where applicable, inventory costs and receivables (see cash conversion cycle)
9. Prepare an operating budget and cash flow for the business for a reasonable period (at least 12 months), and compare the results to industry benchmarks

EVALUATION:
Armed with this information, assess your venture in terms of the "three Ms": Market, Management and Money, and evaluate your responses. Ask as many colleagues as you can find to do the same, to ensure all emotion is removed from the final evaluation and decision.

A simple numeric way of doing this is to assign a value, say a score out of 10, for each checklist item. 9 checklist items, means a maximum score of 90. An overall score of less than, say 70, or any individual score of less than 5, would be a strong indication that the feasibility of the project simply doesn't stack up in its present form.

Depending on the evidence, the venture could be deemed:

• not viable, or;
• viable, or;
• viable if certain conditions are met. This may or may not involve further research to help reduce the perceived risk.

If the project doesn't look feasible on an objective analysis, you have the option of fixing the low score areas, or changing the proposal, or dumping it entirely in favour of something else. In the end you must be ruthless - it could save you a lot of money.

This evaluation process needn't be restricted to a startup. It can also serve as a disciplined way to review an existing business, and to stimulate strategic thought.