Feasibility Study: A Practical Diy Guide for Sme Projects with a Detailed Case Study

By Jackson G. Majura

Jackson G. Majura graduated with a BSc (Hons) degree in mechanical engineering from the University of Dar es Salaam in the beginning of 1980. Since then, he has worked in various senior positions in the transport, wood processing, cement, and soda ash industries in Tanzania, South Africa, and Botswana. He is a professionally registered engineer with the Engineers Registration Board (ERB), Tanzania.

As part of his Executive Development Program, he has gone through a wide range of comprehensive honing programs in project analysis and management, finance, marketing, and strategic management, at home and abroad.

During his career, he has worked extensively in projects, engineering maintenance, and plant management. He has successfully initiated and steered several greenfield projects, from feasibility study to final implementation and handing over.

After taking an early retirement at the end of 2011, he cofounded JSC Global Services Co. Ltd. One of its core businesses is the preparation of feasibility studies for small to medium enterprises (SME) projects for entrepreneurs. The company has completed several bankable feasibility studies for SMEs in agro-processing, municipal waste-to-energy, building materials, dairy and fish farming, waste plastic recycling, bottled water, and many more. A comprehensive list can be found at the company’s website: [e-mail].

• Language: English
• Publisher: Xlibris UK
• Release date: Apr 25, 2019
• ISBN: 9781543490107

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Copyright © 2019 by Jackson G. Majura. 778395

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

Rev. date: 04/17/2019

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Contents

1 Feasibility Study: An Overview

1.1 What is a feasibility study?

1.2 Are feasibility studies necessary?

1.3 Feasibility study or business plan?

1.4 The genesis of business ideas

1.5 The feasibility study process

1.5.1 Cost and expected accuracy of various phases

1.5.2 Conceptual or scoping phase

1.5.3 Pre-feasibility study

1.5.4 Feasibility study

1.6 Why feasibility studies sometimes fail to deliver

1.7 Situations necessitating feasibility studies

1.8 Key feasibility study deliverables

1.9 Concluding remarks

2 Market Analysis

2.1 Introduction

2.2 Market research

2.2.1 Qualitative and quantitative data

2.2.2 Market research process

2.2.3 Secondary research

2.2.4 Primary data collection using the survey method

2.2.5 Sampling

2.2.6 Designing the questionnaire for data collection

2.2.7 Sample questionnaire for SUNFLO project

2.2.8 Data analysis and interpretation

2.2.9 The report

2.2.10 Selected sample findings from the SUNFLO project

2.3 Developing the marketing strategy

2.3.1 The basics

2.3.2 Understanding your SWOT

2.3.3 Choosing the a market poisiton

2.3.4 Market segmentation

2.3.5 Differentiation

2.3.6 Positioning

2.4 Tailoring the marketing mix

2.4.1 Product

2.4.2 Price-setting methods and strategies

2.4.3 Distribution channels

2.4.4 Promotion

2.5 Guerrilla marketing

2.6 Revenue and marketing budget

2.7 Concluding remarks

3 Technical Feasibility

3.1 Introduction

3.2 Plant capacity

3.2.1 Introduction

3.2.2 Plant capacity determining factors

3.3 Location and site selection

3.3.1 Introduction

3.3.2 Location selection factors

3.3.3 Site selection factors

3.4. Production process

3.4.1 Process description using the process flow diagram

3.4.2 Production inputs

3.5 Plant layout

3.5.1 The importance of doing it right the first time

3.5.2 Objectives

3.5.3 Typical facilities

3.5.4 Layout steps and basic considerations

3.6 Choice of technology

3.6.1 Availability of alternatives

3.6.2 Fundamental considerations

3.7 Supply feasibility

3.7.1 Data collection for decision-making

3.7.2 Raw material and other production inputs

3.8 Utilities

3.8.1 Power supply and distribution, control, and instrumentation

3.8.2 Water

3.8.3 Steam and fuel

3.9 Spare parts and maintenance

3.9.1 Spare parts

3.9.2 Engineering maintenance

3.10 Legal aspects

3.11 Fire protection equipment

3.12 Assessing the environment

3.12.1 Introduction

3.12.2 Screening

3.12.3 Scoping

3.12.4 Prediction and mitigation

3.12.5 Management and monitoring

3.13 Concluding remarks

4 Organization and Human Resources

4.1 Organization

4.1.1 Introduction

4.1.2 Organization during project phase

4.1.3 Organization during operation phase

4.2 Estimating human resources requirements

4.2.1 Deciding on key functions

4.2.2 Estimating staffing levels

4.3 Human resources development

4.4 Human resources cost

4.4.1 Direct costs

4.4.2 Benefits

4.4.3 Other costs to company

4.5 Determining the compensation package

4.6 Concluding remarks

5 Project Costing

5.1 Introduction

5.2 Cost estimation methodologies and process

5.2.1 Estimation methodologies

5.2.2 Cost estimation process

5.3 Capital costs

5.3.1 Accuracy and data sources

5.3.2 Main plant machinery and auxiliaries

5.3.3 Land, buildings, and infrastructure

5.3.4 Initial working capital and preliminary expenses

5.3.4 Buy vs. lease decision

5.3.5 Schedule of total investment cost

5.3.6 Project funding and disbursement

5.4 Operating costs

5.4.1 Operating cost elements

5.4.2 Operating cost estimation

5.4.3 Operating costs projection

5.4.4 Summary of operating cost categories

5.5 Concluding remarks

6 Preparation of Financial Statements

6.1 Introduction

6.2 Income statement

6.3 Balance sheet

6.3.1 The accounting equation

6.3.2 The balance sheet building blocks

6.4 Cash flow statement (CFS)

6.4.1 Purpose

6.4.2 Preparation of CFS

6.5 How the three financial statements talk to each other

6.6 Concluding remarks

7 Project Analysis and Appraisal

7.1 Introduction

7.2 Financial vs. economic appraisal

7.3 Principles and conventions of financial cash flows

7.3.1 The nature of financial cash flows

7.3.2 Identification and treatment of financial cash flows

7.4 Project appraisal

7.4.1 Introduction

7.4.2 Appraisal methods and criteria

7.4.3 NPV vs. IRR

7.4.4 Simplified weighted average cost of capital (WACC)

7.4.5 Value added

7.5 Sensitivity analysis

7.5.1 Selection of variables for investigation

7.5.2 The sensitivity analysis process

7.5.3 Management of sensitive variables

7.5.4 Limitations of sensitivity analysis

7.6 Accounting methods for gauging project risk

7.6.1 Break-even analysis

7.6.2 Degree of operating leverage

7.7 Analysis of financial ratios for the project

7.7.1 Solvency ratios

7.7.2 Profitability ratios

7.8 Risk analysis

7.8.1 Introduction

7.8.2 Risk mapping

7.8.3 Risk qualification, quantification, and prioritization

7.8.4 Risk mitigation and monitoring

7.9 Beyond the bottom line

7.10 Concluding remarks

8 Project Implementation

8.1 Introduction

8.2 Preliminary list of main activities

8.3 Preliminaries

8.3.1 Company formation and registration

8.3.2 Preparation of the business plan

8.3.3 Project funding

8.3.4 DIY or subcontracting decision

8.3.5 Appointing the project manager

8.3.6 Responsibility matrix

8.4 Activity details and resource estimation

8.4.1 Work breakdown structure of implementation tasks

8.5 Activity scheduling

8.5.1 Scheduling using the Gantt chart

8.5.2 Scheduling by using PERT/CPM

8.6 Resources assessment

8.6.1 Human resources

8.6.2 Tools, equipment, and materials

8.6.3 Site office requirements

8.6.4 Work packages as the basis of resource estimation

8.6.5 Implementation budget

8.7 Project tracking and monitoring

8.7.1 Introduction

8.7.2 Tracking and monitoring framework

8.8 Project status report

8.8.1 Safety

8.8.2 Overall health of the project

8.8.3 Milestones

8.8.4 Expenditure vs. physical progress

8.8.5 Escalated issues

8.8.6 Project risks

8.9 Key activities for the implementation process

8.9.1 Project engineering

8.9.2 Permits

8.9.3 Tendering

8.9.4 Award of contracts and commencement of civil works

8.9.5 Equipment shipping

8.9.6 Pre-production marketing

8.9.7 Installation of machinery and equipment

8.9.8 Commissioning

8.10 Key success factors

8.11 Concluding remarks

9 Feasibility Case Study: Tilapia Fish Farming and Processing Facility

9.1 Market analysis

9.1.1 Domestic fish market

9.1.2 Fish demand/supply gap

9.1.3 Tilapia and aquaculture production

9.1.4 The export market

9.1.5 Domestic market

9.1.6 Market segments

9.1.7 Competition

9.1.7 Market share

9.1.8 Marketing strategy

9.1.9 Marketing budget

9.2 Technical feasibility

9.2.1 Introduction

9.2.2 Production process overview

9.2.3 Site selection facilities layout

9.2.4 Land

9.2.5 Soil

9.2.6 Water availability, supply, and distribution

9.2.7 Farm layout

9.2.8 Availability of services and farm inputs

9.2.9 Pond design and construction

9.2.10 Pond preparation and stocking

9.2.11 Water quality management

9.2.12 Feeding

9.2.13 Prodction program

9.2.14 Harvesting

9.2.15 On-farm processing

9.2.16 Farm records

9.3. Organization and human resources

9.3.1 Organization of daily farm activities

9.3.2 Required staff and training

9.4 Environmental assessment

9.4.1 Socio-economic impacts

9.4.2 Environmental impacts

9.4.3 Enhancement and mitigation of socio-economic impacts

9.4.4 Mitigation of environmental impacts

9.5 Project costing

9.5.1 Investment cost

9.5.2 Operating costs

9.6 Financial analysis and appraisal

9.6.1 Key assumptions

9.6.2 Analysis of results

9.6.3 Sensitivity analysis

9.6.4 Project risks

9.6.5 Conclusion and recommendations

9.6.6 Critical success factors

9.7 Project Implementation

9.7.1 Search for a suitable site

9.7.2 Kick-off meeting with the community

9.7.3 Permits

9.7.4 Funding

9.7.5 Availability of fingerlings

9.7.6 Implementation tasks

9.7.7 Pond construction

9.7.8 Water and power supply system

9.7.9 Pond preparation

9.7.10 Stocking the pond with fingerlings

9.7.11 Fish processing unit

9.7.12 Detailed implementation tasks

Annexures

Appendix

Appendix 1 Using Excel Table Function to Perform Sensitivity Analysis

Appendix 2 Replacement Project Analysis

To my two sons,

Daudi and Manyama.

Without your incessant prodding,

this book may not have seen the light of day.

Preface

The journey of writing this book began almost by sheer happenstance. I was working in Botswana in Southern Africa when a friend asked me to assist him in preparing a feasibility study for a recycling project that involved processing recycled plastic into different types of products. Since my time was then at a premium, I referred him to several books on the subject of feasibility studies which I knew were on the market. After sampling a couple of them, he told me that he found them too complicated to enable him to prepare a feasibility study on his own.

At first, I thought that perhaps my friend was the odd one out. I was wrong. In talking to a number of people with similar needs, I found that they expressed the same sense of despondency. Most of them had good business ideas but did not know how to systematically investigate them to determine if they were financially feasible. Some had their own businesses, started through hit-and-miss attempts, and in the process they admitted that they had lost money during the nascent periods—a problem that could have been avoided had they done feasibility studies beforehand. And no bank would lend them seed money without a feasibility study showing the viability of their business plans. Clearly, my friend was not alone in this quagmire.

That’s when it dawned on me that there was a yawning gap for an appropriate, simple-to-understand, and do-it-yourself book on this subject. The primary motivation for putting together this guide¹ is to fill this gap. It is a step-by-step practical guide designed to help entrepreneurs and learners alike to prepare (or be able to understand and analyse) their own feasibility studies for small to medium-sized enterprise (SME) projects. Most concepts are lucidly explained from scratch, to the extent that very little prior background knowledge in most of the disciplines that are necessary for rolling out a feasibility study will be required.

A feasibility study guides the entrepreneur in analysing the viability of a business idea and in the end decide whether it is worth pursuing or not. All activities of the study are focused on helping the individual to make this decision, using facts and figures collected during the study. Contrary to popular belief, collecting relevant information, writing, and analysing a feasibility study for a project is not very complicated. What is true is that it requires one to assemble as many facts and figures as possible about the business idea under consideration. These include availability of market, resources to be used in the project, technology, skills, location and site, and environmental issues. All information has to be systematically collected, collated, validated, analysed, and appraised in order to zero in on the appropriate decision.

The process of going through this is will be amply explained in this guide. I will explain, in simple and clear terms, the following aspects, among others:

• making valid, relevant, and defendable assumptions

• collecting primary and secondary data on the market and analysing it

• assessing the availability of the market for the products or services before proceeding further

• estimating capital and operating costs

• preparing financial statements for the project

• analysing and appraising the project

• packaging the information in appropriate formats

• presenting credible conclusions so that lenders and investors will find it impossible to turn away the proposal

As a DIY guide, this book presents numerous examples for explaining every new idea as clearly as possible. At the end, I’ve included a comprehensive real-life feasibility study case that will help the reader to crystallize the understanding grasped after navigating through the book.

Lastly, let me point out that I do not pretend to be an alchemist who will turn potential entrepreneurial dreamers into instant doers as soon as each has gone through this book from cover to cover. The real intention is to show entrepreneurs how they can translate their business ideas into palpable projects by enabling them to convince financial institutions to extend loans after presenting their feasibility studies. If this aim will be achieved, the mission of this book will have been accomplished with tremendous success.

Organization of the Book

The book follows the natural flow of an actual feasibility study. The chapters logically follow each other in the same way that topics of most feasibility studies would be sequentially arranged. The detailed case study at the end of the book utilizes the same framework.

Chapter 1 examines the basic process of a feasibility study, from conceptual or preliminary screening process, pre-feasibility, and the final feasibility study. The desirability of going through a series of steps, the expected accuracy, and the cost of each stage are highlighted. Potential pitfalls and the reasons feasibility studies sometimes fail to deliver the expected results are delineated. This chapter emphasizes the phased approach in carrying out a feasibility study, with the possibility of exiting the process at any stage when there is solid evidence based on the information so far gathered and analysed that the venture will not make money.

Chapter 2 covers market analysis, which is the underpinning of any business feasibility study. It starts with a description of the market research process, emphasizing its importance as the crucial phase of a feasibility study. It explains how primary and secondary data can be collected and the methodology thereof, with emphasis on the former. The market research process is completely demystified, the objective being to demonstrate that for SME projects, it can be successfully carried out on a DIY basis. Methods of sampling the target population are briefly discussed, with examples on how to determine sample size and sample errors and the correlation of population parameters with sample statistics.

An extensive example of a market survey questionnaire from the SUNFLO project, a real-life project utilized throughout the guide, is used to illustrate the basic principles of designing and administering a questionnaire for primary data collection during a market survey. Analysis and presentation of the market research data collected and how it is used to design a marketing program is expounded on, including the custom-tailoring of the marketing mix to each selected segment to achieve the marketing objectives of the project. A number of pricing strategies and methods are discussed in detail to enable the user of this guide to select the appropriate pricing method and enhance the chances of the project earning a decent profit while growing more customers for the business.

Chapter 3 focuses on a technical feasibility analysis. Key issues covered include selection of site and location, plant capacity determination, plant layout, availability and supply of raw material and other inputs, choice of technology, assessment of the environment, and organization and human resources. The role of technical analysis in a feasibility study and how it provides support to financial estimates for the project inputs is underlined. Examples are given on plant layout, use of process-flow diagrams in a manufacturing environment, and the assessment of utilities like power, water, and steam.

Chapter 4 is devoted to the vital aspect of organization and human capital. It delves into the simple design of organization structures for a typical SME project, using the production unit model. Different structures and their suitability for the kind of projects envisioned in this guide are discussed. The determination of the optimal number of personnel in a project is generously amplified. Finally, the training and development of project personnel, whenever this is required, is explained, with a suggested format for capturing the information and assessing training needs.

Chapter 5 explains, with copious examples, how the various project cost elements are assembled. The chapter is divided into two main parts. The first part covers the estimation of capital costs, such as main machinery auxiliaries, buildings and infrastructure, preliminary expenses, and initial working capital. The analogy and build-up methodologies of cost estimation are expounded on. The second part dwells on the assessment and forecasting of various elements that constitute the operating costs for a typical manufacturing-oriented project. It starts by listing all the main components and explaining their subdivision into fixed, variable, direct, and indirect. Methods for computing depreciation and financial costs are illustrated with comprehensive examples. The chapter also underscores the importance of making valid and reasonable assumptions and the use of verifiable figures and economic indicators in cost estimates. An extensive list of possible sources of information (depending on a particular project) for preparing estimates is included.

Chapter 6 starts by defining the building blocks for each financial statement using basic and easy-to-understand frameworks that utilise the cost figures prepared in the previous chapter. The accounting equation is explained with an in-depth example of transactions demonstrating the double-entry accounting principle and why the balance sheet will always balance. An example for each financial statement is shown in the case study.

Chapter 7 offers a comprehensive explanation of most of the tools commonly employed in the appraisal of business feasibility studies. These are divided into two categories: discounted and non-discounted. The former category includes net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). Non-discounting methods covered include payback period (PB) and accounting rate of return (ARR). The pros and cons of each method are explained and the computations illustrated, step by step, using Excel functions where applicable. Manual calculation methods are avoided, in keeping with the trend in the present age where there is, at least, a desktop computer in almost every urban home or accessible from the nearest Internet cafe.

Sensitivity analysis, a critical tool for gauging the risk of a project emanating from variations in key variables, is covered using a detailed example. A step-by-step method of calculating the variable changes using the Excel table function is illustrated in order to save the reader’s time when using the laborious manual process. Other tools covered in this chapter include break-even analysis, degree of operating leverage (DOL), risk analysis, and the use of financial ratios. The purpose of each tool is amply explained. The calculation of value added or wealth created, although in most cases not required as an evaluation yardstick for private business projects, is included for the benefit of entrepreneurs who might be looking for funds from the government for financing their projects, for whom distribution of wealth created to employees and government would be of interest

Chapter 8 walks the reader through the essential steps required to guarantee a successful project implementation, from initial planning to working out and scheduling of implementation activities to estimation of required resources and putting together an implementation budget. A generic list of activities applicable to most SME projects is included. The chapter ends with a comprehensive list of key success factors for the implementation of most projects.

Case Study

The last part of the guide contains a detailed case study which has been adapted from a real feasibility study conducted by the author, with express permission from the clients. However, for the sake of confidentiality, some of the figures have been slightly changed. The purpose of including the case study is to enable the reader to appreciate how the principles explained in the guide can be used to prepare a feasibility study from market analysis to implementation.

The case study is for a tilapia farming and processing project. In the case study, all that has been discussed in the guide is put to practical use, showing the reader in very clear detail how each component goes into making an actual feasibility study.

Distinctive Features

Feasibility Study: A Practical DIY Guide for SME Projects shows how to prepare a feasibility study from start to finish, incorporating all aspects normally required by lenders, investors, and other stakeholders. Features that set it apart from similar works on the subject include:

• Practical approach. Feasibility studies utilise knowledge from diverse disciplines, such as engineering, marketing, economics, environment, and finance. This book shows how the seemingly theoretical building blocks from these fields can be used to translate simple business ideas into tangible units, producing goods and services which are finally sold to customers at a profit. The book achieves this in a very practical way that will appeal to all entrepreneurs, most of whom are result-oriented. One of the important aspects emphasized over and over again is that in order to prepare a successful feasibility study, one must do a bit of research to gather missing details.

• Numerous contextual examples. The book conveys the feasibility-study framework using numerous examples to facilitate understanding. Without such examples, it would be difficult for the reader to understand by merely perusing the mass of text. The author is convinced that practical examples greatly contribute to the understanding of new ideas. Users of this guide are advised to jump straight to relevant examples whenever they find the initial introduction of the idea somewhat difficult to digest and come to the rest of the text later on. However, the guide’s simplicity will make such instances the exception rather than the rule.

• Appeal to a non-finance audience: Oftentimes, financial jargon is approached with trepidation by readers who are not equipped with sufficient exposure to the field of finance. The guide demystifies most of these terms to the benefit of the non-finance reader, using relevant simple examples where appropriate. Since the book is a DIY guide, the author makes no assumption of in-depth knowledge in engineering, finance, or marketing.

• Comprehensive real-life case study. The case study is meant to reinforce the reader’s understanding of the concepts discussed in the guide. The case is sufficiently explained so it can be easily assimilated by the average reader, save for a few technical details specific to the project. It will serve as a blueprint for any entrepreneur who wants to prepare a feasibility study on a DIY basis, which is the overarching objective of this guide.

• Pedagogic orientation. Every chapter of this guide—whether it covers technical issues, marketing, or finance—assumes that the reader knows almost nothing about the subject. It is for this reason that each starts with a back-to-basics approach for almost every concept for those who are complete neophytes. This approach takes a cue from a number of colleagues the author has worked with on numerous projects. The author believes that the step-by-step learning approach will enable most readers, if not all, to understand the material presented in the guide with little or no difficulty at all.

Because of its user-friendliness and other features mentioned above, this guide should immediately appeal to most serious entrepreneurs, students enrolled in entrepreneurial studies in tertiary institutions of learning, and young men and women who graduate from colleges each year intending to apply for loans to start their own projects. It will easily find a comfortable refuge in the bookshelves of many individuals with interest in the subject.

Scope of SME Projects

The scale of projects which the feasibility-study framework in this guide seeks to address are small-to-medium enterprises (SME). Before this book goes into print, the envisaged SME, based on maximum total capital investment and staff headcount of full-time employees (FTE), is less than or equal to USD 1,000,000 and 50 FTE for small-scale and USD 1,000,000 to USD 5,000,000 and 250 FTE for medium-scale projects.

The FTE tag is not particularly important, as it depends on the type of project and technology used. However, the ideas in the guide can still be adapted with relative ease for slightly smaller and larger projects outside this bracket. On the basis of the above categorization, the two case studies are in the micro category (less than USD 10,000,000 capital investment), as they are for illustrative purposes only.

Acknowledgements

Few books can be successfully completed without help. In addition to people I will directly mention, there were many others who helped me in one way or another in completing this book. Help came in the form of suggestions, positive criticisms, corrections, and encouragement.

I would particularly like to thank the management of JSC Global Services Company for permitting me to use the data from the SUNFLO project market survey as well as numerous other data and figures from actual feasibility studies they had carried out for various customers. Without this information, the practical touch of this book would have been significantly compromised.

My sincere thanks are also extended to my daughter Zerulia, who utilized her ICT geekiness to give some of the financial models in this book a real dot-com outlook. Furthermore, I acknowledge the patienc and encouragement of my entire family who have shared my time and attention while while I worked on this project, and their belief in my work.

Brighton Kilamile used his many years of hands-on professional accounting experience to weed out any financial jargon that could threaten non-finance readers.

Engineer Alex Mafuru helped a great deal in shaping the electrical power planning section of the book, which is so important in packaging a feasibility study.

I am immensely grateful to a number of close friends, mostly former college-mates, for the encouragement and moral support they gave me to continue, after discussing the concept of the book while it was in its early stages.

I also with to emphasise my thanks to my publishers, Xlibris, for their continued positive enthusiasm and support throughout the publication process of the book. The editorial team deserves special mention for their tireless and painstaking efforts in ensuring that any error, however slight, is corrected.

Finally, I would like to apologise in advance for any omissions. You know who you are, even if I forgot to mention you.

Jackson G. Majura

Chapter 1

Feasibility Study: An Overview

1.1 What is a feasibility study?

A feasibility study is nothing more than what the name implies: a structured analysis designed to determine whether a specific business idea has the potential to succeed when all relevant factors—including technical, financial, economic, legal, and environmental—are considered. The primary aim of conducting such a study is to enable investors to make an informed decision, based on facts and figures, as to whether they should invest in the venture or not. In various stages of the study, the goal is to provide a go/no-go decision. Deciding in good time that an idea is not worth investing in can save a significant amount of time, money, and heartache later on

One of the principal characteristics of a feasibility study, as we shall see later in this chapter, is that it is a multiphased and iterative process. This explains the various prefaces when describing a feasibility study, such as order of magnitude, preliminary, indicative, pre-, final, bankable, definitive, detailed, and other terms indicating the level of detail at different stages. At the end of each stage, there will be an exit door, meaning that if the conceived idea is deemed not to be feasible on the basis of available information, the process will be aborted there and then to obviate the risk of wasting more resources on an infeasible venture.

In the earliest phase, one of the key elements of the investigation is the establishment of the availability of a market for the product or service.² When facts support a strong conclusion that a market does not exist, this finding alone justifies termination of the study process, paving the way for re-examination of the business idea or switching to alternative options altogether.

1.2 Are feasibility studies necessary?

The answer is a resounding yes. Entrepreneurs who try to venture into business without carrying out a feasibility study beforehand defend their omission with a lopsided and misplaced argument that since some of the most successful businesses on earth today never started with any feasibility study, why shouldn’t they become successful by taking the same route? While it is true that some of the most reputable Information and Communications Technology (ICT) ompanies—including Microsoft, Apple, and Google—started in this way (some of them in backyard garages) more than four decades ago, trying to follow the same approach in the present cutthroat competitive environment would be extremely reckless. For large, capital-intensive projects, such an approach could land the entrepreneur in financial ruin of apocalyptic proportions. The melancholy truth remains that, in order to start a successful business venture, a feasibility study is now essential. There are compelling reasons galore, as discussed below.

When the investment process is preceded by a feasibility study, an investor will know in advance the expected profitability of the project. If a loan is required, seasoned lenders will insist on supporting evidence in the form of numbers to prove that the project will make a profit and enable investors repay the loan. Before other entrepreneurs will get on board, they will insist on being assured that the business will make a decent return, which will be more than what they would get if they were to deposit their money in bank accounts and spend most their time enjoying themselves on the beach or playing golf.

Anyone contributing capital to a project would like to see proof of the existence of a market for the product the business will be selling once it is in operation. Without this proof, only true risk lovers will invest in the venture. Unfortunately, entrepreneurs who are not risk-averse are becoming an endangered species indeed.

A feasibility study will go a long way in identifying potential flaws, business risks, insurmountable challenges, strengths, weaknesses, and threats which may affect the sustainability of the project. It will enable investors to estimate the cost of machinery and buildings, working capital, project implementation, human resources, raw material, utilities, and other resources so that an adequate amount of money can be set aside.

If you still want to translate a business idea into a tangible investment without any feasibility study, think again. Doing a feasibility study before investing your money in any business will help to keep those migraine tablets away from the bedside table.

1.3 Feasibility study or business plan?

The difference between a feasibility study and a business plan (BP) is an area of confusion to many. More often than not, there is a mix-up between the two. The fact is that they are not the same, although they share some of the same information, which makes the difference between them rather nuanced. For a new project, a feasibility study precedes a business plan. The latter is conducted just before starting operation of the facility or for a loan application process. The BP outlines a series of strategic actions that will guide business operations over a period of time and be updated from time to time as the business climate changes.

A comprehensive feasibility study for a new venture creates an avalanche of data to be used in the preparation of a business plan. For instance, market research conducted during the feasibility study will provide valuable information for the business plan, including profitable market segments, market share, competitors, pricing of products in the market, marketing costs, size of the market, product pricing, and available distribution channels. This information will be used in the marketing plan, an important component of the business plan. To put it more succinctly, a business plan is a blueprint for business operations and will be periodically updated during the lifetime of the business. A feasibility study, on the other hand, will be conducted only once, unless other business circumstances (as outlined under 1.7) arise.

1.4 The genesis of business ideas

Most businesses are conceived from exceedingly simple ideas. The intriguing story of Coca-Cola springs to mind. In 1886, a curious Atlanta pharmacist, Dr John Stith Pemberton, concocted a flavoured syrup. He mixed it with carbonated water, and most of his friends who sampled it described it as excellent. The rest, as they say, is history. Today, Coca-Cola is a multi-billion-dollar business empire with a brand value estimated at more than USD 80 billion in 2014. It never occurred to Dr Pemberton (who died two years later in 1888) that the simple drink he had devised on his three-legged kettle would metamorphose into one of the most admirable global business conglomerates on this planet. The stories of blue-chip giants like Microsoft and Apple are not much different.

Other business ideas come out of the need to satisfy an existing demand for a product in a certain market area. This could be a restaurant in a city suburb, real estate in a town close to where precious minerals have been discovered, biogas or solar power units in an area without access to the electrical grid, and so forth. Again, the business may start on a very small scale, but when managed well, it can blossom into a corporate giant. The need for a feasibility study arises when one wants to midwife such an idea into a tangible investment.

1.5 The feasibility study process

Save for very small projects, a feasibility study is invariably broken down into phases, the reason being the uncertainties inherent in the investigation process. Since for large projects feasibility studies cost a fortune to carry out, any investor would like to know as early as possible whether the business idea is worth continuing to spend money on or not.

The three standard phases of a feasibility study act like a screen for allowing the process to proceed to the next stage only when the previous threshold conditions are met. The cost, level of detail, and accuracy increases from one stage to the next, while the amount of risk decreases. As one phase is completed, the risk of having committed funds in an unprofitable venture is reduced. A feasibility study framework is shown in Figure 1.1.

1.5.1 Cost and expected accuracy of various phases

The cost of various phases of feasibility studies varies quite substantially depending on the size and nature of the project, the type of study being undertaken, the range of options being investigated, and a host of other factors. The accuracy of the investment and operating cost estimates increases as the project progresses from preliminary to full feasibility. For example, the cost of carrying out a full feasibility study for small to medium-sized enterprise (SME) projects charged by most consultants varies between 1.0 per cent and 3.0 per cent of the total investment cost, while the expected accuracy would be in the range of plus or minus 10 per cent.

1.5.2 Conceptual or scoping phase

This is invariably the first phase of any project-viability investigation, its primary purpose being to develop concepts and answer questions as to whether it is worth the effort to proceed with the pre-feasibility study, which involves more resources than used during this phase. Because of the limited investment in the study and the level of accuracy required at this stage, various assumptions and data from similar projects, relevant publications, and the industry are used. Care should be exercised during the initial studies, as a viable project may be wrongly rejected on account of inadequate assessment. It pays to engage the most experienced people during this phase of the investigation because the dearth of reliable and researched data means that more information may have to be extrapolated. An experienced person in the field can partly draw from practical situations and arrive at a more rational and realistic conclusion.

In the mining industry, for instance, an estimate of the grade and quantity of the mineralization that is to be mined is made. The price of the metal at that time allows a determination of the in-site gross value, which is then extrapolated using appropriate factors to determine the potential ore value before it is mined. In this case, the scoping study is based on an approximate grade and recovery and does not aim to provide assessment of whether sufficient economic reserves exist. In such a situation, the experience of the individual doing the scoping study will add enormous value to the final conclusion.

It is fatally easy for the entrepreneur not to attach appropriate gravity to this phase of the study by allocating inadequate resources. Although it is true that this phase should be relatively inexpensive, allocating insufficient funds to it may result in missing the opportunity altogether; the investigation may be too superficial on account of budget constraints. The amount of resources allocated to this phase should be commensurate with the level of investigation to be carried out, which in turn will be influenced by the quality and quantity of information already available and the type and scale of the project. When this phase has been successfully completed, the question to be answered is: Has the investigation shown any positive prospects for continuing with the next phase? If the answer is in the affirmative, then the next stage will be to undertake a pre-feasibility study.

When appropriately executed, the screening study may provide the following information to prospective investors or project sponsors:

• outline of the general features of the opportunity

• order of magnitude of the capital and operating costs

• identification of issues requiring further study

• the required resources (time, human, financial) required for the execution of the next phase (the pre-feasibility study)

• identification of key success factors for the opportunity

• benchmarking information from similar projects in the same environment (if available).

Figure 1.1: Feasibility study process

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1.5.3 Pre-feasibility study

The pre-feasibility study starts where its precursor, the screening study, stops. It provides information required by entrepreneurs and ranks different alternatives for carrying out the business concept, providing an opportunity for assessing the best alternative available. After conducting their own preliminary due diligence based on the facts given to them, entrepreneurs can decide on the next best course of action.

The deliverables from this stage will enable the entrepreneur to decide whether it makes sense to continue with the next phase (the feasibility study) or to discontinue any further studies. It is an intermediate stage between conceptual study and full feasibility study and a useful reality check. For micro-investment projects, a properly done pre-feasibility study may have most of the information required for an investment decision, with very limited refinements, without the need for a full feasibility study.

Typical terms of reference (ToR) for a pre-feasibility study include:

• assessment of the technical and financial viability of the opportunity to the accuracy expected from the study phase

• preliminary establishment of the demand-supply balance of the product or service in the market

• preliminary working out of the optimum plant capacity in line with limiting constraints (such as market share, technology, capital, and available raw material)

• refinement of the order-of-magnitude cost for capital and operating costs established in the previous phase

• proposing the optimum plant location based on key variables (such as availability of raw material, suitability of site, and existing infrastructure)

• recommendation of the preferred alternatives for various aspects to be examined in the feasibility study

• specification of any detailed support studies required (such as laboratory tests for raw material testing and evaluation, pilot plant tests, or preliminary environmental studies to provide input into the EIA study)

• identification of key project risks and success factors

• preliminary evaluation of the project

• estimates of the cost, time, and other resources needed for the feasibility study

• a comprehensive report with supporting appendices and recommendations on the way forward.

When comparing the feasibility study deliverables found in section 1.8, it is apparent that the two phases dovetail. As with the preliminary study, the feasibility study starts where the pre-feasibility study ends. It builds on and refines most of the pre-feasibility study’s deliverables.

1.5.4 Feasibility study

The fundamental difference between a pre-feasibility and a feasibility study is the depth of analysis and quality of details rather than the overall structure. As the last phase before an investment decision is to be made, it should be conducted with the highest degree of diligence and attention to detail. At the end, one question expected to be answered from its massive information is: Will it be viable?

During this phase, the opportunity to add value to the proposed project is at its peak. Different aspects of the project are being studied in detail to determine what the project should and will be, and the final optimum configuration. Once a decision to proceed is made and the design, procurement, and construction efforts commence, there will be very little opportunity left to influence the project outcome.

Excellence in project execution is required to maintain the value created from a good feasibility study, in the same way that a well-planned implementation and final operation is required to deliver the value. Keep in mind that a poorly designed project will not deliver the same outcome as a well-defined one, irrespective of how well executed and operated. Almost always, little or no scope exists to add or create value during project execution if such an opportunity has been missed at the feasibility study stage.

That said, it is important at this stage that all aspects of the feasibility study—marketing, technical, engineering, financial, and the final appraisal—should be critically examined in an iterative manner, with a view to optimizing the deliverables so that the final outcome will be a project which will not pose any unknown risks during execution or operation. All data and assumptions must be made available and rigorously justified. A range of scenarios for raw material supply, technology selection, plant layout, location and site selection, capital, and operating cost estimates should be presented accurately, honestly, and in verifiable detail.

After all the data have been checked, rechecked, verified, and validated, the final appraisal—which is the critical part of the feasibility study—can be made. The process will begin with

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[Arafath Iqbal · Rating: 5 out of 5 stars]

if there is audio version of this I will be so grateful