People usually find it difficult to start a business even after obtaining an MBA or other business qualifications because of the fear of failure in a proposed business. Very successful civil and public servants have ended up using all their retirement benefits in promoting businesses that appeared to be very viable at first but at the end turned out to be very unprofitable ventures. Whereas, some stack illiterates have been very successful in that very business in the same market or locality.
Business knowledge has nothing to do with business qualifications but so much to do with business acumen which is something of an innate ability in everyone that can be developed. When a business have been conceived, it has to be hatched through proper planning. A business plan is a good business tool but is only part of a feasibility study.
If we consider an undeveloped oil field as an example, a feasibility study will involve determining the quality (physical and chemical), cost and time of production per unit quantity and the number of wells that will make production feasible in terms of man hours. It will also consider, the political, economic security, tax, production sharing contract agreements, license procurement cost and intrigues etc. it will consider the profitability (feasibility) of different available technology having in mind the financial and human resources available. A business plan on the other hand can show you that the business is profitable, assuming that the crude is of an acceptable standard: whereas a feasibility studies can discover otherwise and end at the point it discovers for instance that the chemical quality is too poor to make production feasible. That is, the cost of production is higher than the sales of the final products after considering the processing techniques vis-à-vis the current available technologies. Therefore a feasibility plan may consist of laboratory, engineering/survey or architectural, socio-cultural, economic reports and designs which are often not necessary in a business plan.
Inconsideration of similar facts have led to the failure of many new businesses. This article is aimed at helping entrepreneurs, without prior training, know how to design new businesses and will help them to choose the most viable options to invest in. It shall be in parts, (I & II)
Differences between a Feasibility Studies and a Business Plan
Feasibility Studies:
- Usually done for new businesses
- All encompassing
- Usually contains background Information
- Requires extensive literature Review and collection of data
- Reviews of the performance of the economy in previous years, economic forecast and the findings of analysis/surveys are essential for proffering recommendation for the proposed business.
Business Plan
- Usually for expansion of existing businesses
- Considers financial management analysis only
- May not contain a Background information.
- May not require literature review but use of data is as essential as in feasibility studies.
- Recommendations are usually based on financial books, market price surveys and ratio analysis
NB. This list is composed on basis of personal experience and is inexhaustible. It is therefore subject to review by readers.
Below are some essential terms used in feasibility studies and in this article. The terms feasibility studies, feasibility report and feasibility plan are used interchangeably.
Some Basic Definitions
- A feasibility study is a scientific inquiry into the total and step by step cost of sales and profit of each of the factors of production necessary for commencing and sustaining a particular business for a forecasted or foreseeable period and the future.
- A business is an organizational unit of documented ideas that are capable of translating effort into profit using scarce resources.
- Capital cost - This is the cost incurred in providing land, landed properties and equipment/implements as well as vehicles and any other such property required for the successful running of a business.
- Pre-operating cost – The cost of expenses incurred in planning, obtaining a feasibility studies/business plan, telephone calls and transportation other utilities etc before the commencement of operations of a business.
- Depreciation – An estimated annual cost of maintenance of capital equipment or property (equipment under capital cost )
- Amortization – The spread or division of the pre – operational cost of the zero year into the profit and loss (P & L) accounts of a few years of commencement of a business so that expenses will not douse the performance of sales or profit of the beginning year.
- Zero year – The period less or more than a year in which planning and implementation activities such as land acquisition and preparation, building and equipment installation takes place prior to operation.
Major uses of a feasibility study
- Feasibility studies are used to determine the profitability of a proposed business and advice investors on the most viable sectors of the economy.
- Is a requirement for capital intensive projects of Government, intergovernmental agencies and well established organizations. It helps such organizations in decision making/planning.
- It is a requirement for obtaining loans for business financing from financial institutions.
- The feasibility studies are guiding documents for the step by step running of a business from registration to implementation and operation for a specified number of years.
As the word connotes, a feasibility studies is a research into a business and it can cut across any field of human endeavor. As with a research, the veracity of the findings are based on the genuineness of the samples and the accuracy of the experiments i.e. the genuineness and currency of the data and information used in arriving at the conclusions. If a feasibility studies is painstakingly implemented, the findings are always true and the projected values are always achievable as far as the recommendations are taken into cognizance.
Slight differences may occur between the projections of a feasibility report and the actual balance sheets but such differences will not be due to unforeseen circumstances; rather it will be the cause of lapses in implementation for which provision is not made in a feasibility report other than that made for exigencies. Otherwise the differences will be in a positive direction. It is customary for consultants who prepare feasibility studies to assume that the recommendation will be implemented to the letter. For instance, if the feasibility report require that capacity be increased to 60% in the second year in a maximum installed capacity of 1,000 units; failure to comply with these recommendation for whatever reason will affect future projections. The consultant usually makes provision for increase in prices of all the inputs and or inflation as well as unforeseen likely increment in salary year after year even though these are unusual in real situation. So it is rare for feasibility reports to fail inasmuch as the preparer understands the principles and follows them to the letter objectively.
Requirement for Preparing a Feasibility Report
- Sound (basic or secondary/high school) Education
- Knowledge of Book keeping / Accounting principles
- Good background of general mathematics
- Data / information from local, national and international research based agencies and institutions etc.
- Information from window shopping, proforma invoices/quotations from reputable manufacturers and service providers.
- Annual reports of Central Banks, reputable companies in the sector in which the study is made.
- Reports or manuals from raw materials research institutions and technology incubation centres.
- Reports of chambers of commerce and industry
- Financial and audit reports of companies in the sector etc
Assessing a Feasibility Report
Some feasibility reports fail to pass bank assessments because the consultants out of commission or omission failed to account for certain unavoidable expenditures in a bid to avoid repeating the work all over again or in order to sum up with the amount available for the project. Changes to figures are unavoidable in the course of preparing a feasibility report and to avoid unnecessary repetitions, the use of software is indispensable.
The use of software helps in making corrections and the corresponding effect to be automatically adjusted. This makes planning very easy and avoids unnecessary mistakes, data and time wasting.
Other causes of failure of feasibility plans could be as a result of disagreement on information or self contradiction. For instance, a writer says that there will be inflation next year and the Central Bank has reviewed upward the lending rate, then we should expect that the cost of production materials will increase in no less than the corresponding increase in inflation and the interest on loans by a similar proportion respectively. However, it will be proper to let the sales of goods produced remain at current price. We presume the worst scenario, so that if the business survives under such simulated conditions, we know that it will break even no matter the economic recession that may arise. Consultants must ensure that their reports can pass all unforeseen distractions.
References
Investment Profile for Nigeria, Volume 1, Revised, Raw Materials Research and Development Council, Lagos 1994.
Small Business Management, Nigerian Institute of Management SMPE 104 PCM Study Pack, Lagos, Nigeria
Walter, B.M and Robert, F Meigs, 1981. Accounting, The Bases for Business Decisions, McGraw Hill Book Company, New York.
Jeremiah .E Egboge - Jeremiah E. Egboge, (Contributing Writer), Oil and Gas, Manufacturing and Agricultural Consultant
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