Whether you’re planning on running a startup or beginning an exciting new business, if you want others to support you with donations or join your ranks, odds are that you’ll be asked to do a financial feasibility study. As boring as it sounds, running a financial feasibility study is extremely helpful for getting your idea on its feet. It entails creating monetary goals for pushing your business forward — a process that allows you to understand the workings of your business in a concrete way.
What is a financial feasibility study?
A financial feasibility study is essentially a tool used to introduce outsiders to your business plan or idea, whatever it may be. The study details the amount of money necessary to fund your project, along with where that money is coming from and how it will be spent once it is acquired. This assessment of potential cash flow can often reveal undiscovered issues with your business plan and guide you towards jumping over those hurdles.
Why is a feasibility study important?
When you conduct a financial feasibility study, you’re opening your personal business idea to a broader audience. This audience consists of people who could potentially become investors or collaborators. Only about 1 in 50 business ideas are practical and capable of turning a profit, according to the University of Rochester, which means that possible investors pay a lot of attention to financial feasibility studies; the studies help investors weed out the good ideas from the bad and the viable ideas from the ones that will gobble up funds and never make the money back. Your study will contain recommendations for the investors that will serve as evidence that your idea is feasibly going to return their investments.
Steps for conducting and writing a feasibility study.
1. Assess the viability of your business idea.
Before you begin the financial feasibility study, you should assess the market to see if funding your project makes logical sense. You’ll want to look at two factors: audience and competition. If the potential customer demand for what you’re trying to sell cannot sustain your business, this is the time to either modify your business plan or trash it altogether. Similarly, you must assess your competition — get to know the products that consumers might prefer over your own, and see what you can do to make sure your product is superior.
2. Familiarize yourself with the conventional structure.
Most financial feasibility studies follow a very similar format. This is how they’re broken down:
It’s important to be succinct here. Include a table of contents to make the document easier to read.
Here, you’ll describe the product or service that your business aims to provide. If it is physical, photos of prototypes or the product itself should be included. Use this space to talk about how customers will use the product and plans for future upgrades to the existing product.
In this section, you should describe how the product is made (again, if it is physical), or any technological interventions that are necessary for the production process. Make sure you describe any complex technological processes in terms that the average businessman will understand.
• Market environment
Use this section to outline who your business will be serving. Talk about intended consumers — both the customers, who buy the product in stores, and the end-users, who are the eventual owners of the product.
In this section, include a list of key competitors. Make sure to assess both direct competition, or businesses with a product very similar to yours, and indirect competition, or businesses that provide a different product that might fill the same need for a consumer.
If you’re planning on entering an already-existing industry, you’ll need to examine trends in that industry. Look at demand and supply over time, and determine their factors.
• Business model
Here’s where you describe how you plan to make money. Give detail, so that your potential investor will feel like they understand the process when you discuss financial projections later in the document.
• Marketing and sales strategy
In this section, you should state how much money you plan to put toward marketing, ideally outlining a sales plan that spans at least three years. Describe exactly how you plan to advertise, and justify the prices you’ve chosen for your products.
• Production/operating requirements
This section answers a purely physical question: where will your business operate? Once you’ve secured a physical space for operation, list its details (size, age, condition) and the costs of rent and necessary equipment.
• Management and personnel requirements: Here, you should list all the people you plan to bring onto your team, along with their credentials. You should also look to the future — specify how many personnel you predict hiring and what kind of work they will be doing.
• Intellectual property
This section is especially important as it pertains to patents and scientific research. List all the intellectual property — patents, copyrights, trademarks — that your business owns or is in the process of securing.
• Critical risk factors: This is where you should list all the factors preventing you from starting this business. Barriers to entry, economic forecasts or regulations that impede your productivity — be honest about it all. Your investors deserve to know how much they’re putting on the line by investing in you.
• Financial projections
This section is extremely important in a financial feasibility study and will be considerably longer than all the other sections. It should detail start-up capital, funding, potential returns, and investor payment. Read on for tips and tricks to make this section really impressive.
Here, you should state your final findings and recommendations for investors.
3. Follow these financial projections tips.
• Request enough start-up capital to get the business off its feet for the first two years of operation.
It’s important to give yourself time to turn a profit; very few businesses become an overnight success, and the likelihood is that you’ll be losing money for a while before beginning to see returns.
• Invest your own money in your business — and make a big deal about it in your feasibility study.
All possible funds you might secure, from investments to loans, are more likely if the people making those decisions are convinced that you believe in your business idea.
• Discuss variables that might affect investors' profit.
Set up multiple hypothetical scenarios for investors, so that they understand the risk they are taking on.
• Don’t make specific, binding monetary promises to investors.
If you guarantee them a specific dollar amount, or that they will be paid on a specific date, you risk not being able to follow through on that promise and losing a valued partner in this process. Instead, tell them that at the end of each profitable business quarter, they will get a certain percentage of their investment, because that promise will benefit you both.
4. Create an executive summary sheet.
This one-page document should be the last thing you write because it will serve to summarize the meat of your entire proposal. Since the executive summary will be the first thing your potential investors or collaborators see, you need to keep it short and engaging. It should highlight the exciting work you plan to do and how you plan to achieve your goals.
It’s true that startups struggle to compete in the markets they’ve just joined, and small businesses have difficulty finding investors who are willing to believe in their ideas. However, if you complete a financial feasibility study well, your chances of finding willing investors are raised a hundredfold; investors who like to know exactly where their money is going will be impressed by your business acumen and much more likely to give you the funds necessary to fund your dreams.