FINANCIAL FEASIBILITY: WHAT IT IS AND ANALYSIS - DUDAS - 2024

The financial feasibility is the study that projects how much is needed initial capital, return on investment, the sources of that capital and other financial compunction. That is, the study considers how much money is needed, how it will be spent, and where it will come from.

Financial feasibility studies are prepared to identify positive and negative points before making an investment of time and money. When investors have an idea for a new project, they first conduct a financial feasibility study to determine its viability.

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A financial feasibility study should be conducted to determine the economic viability of a proposed project, before proceeding to the preparation of a business plan.

Financial feasibility is not a business plan. The goal of a financial feasibility study is to determine if the proposed project is a profitable idea. On the other hand, a business plan is a detailed plan on how the project will be implemented and managed successfully.

Financial feasibility analysis

Financial feasibility analysis is considered one of the key pillars of astute investment decisions. It is one of the most critical stages of feasibility studies in general, in which the investment decision will be made.

Measures the scope of the commercial profitability of the project, determines the sources of financing and the structure of this proposed financing project.

Financial feasibility focuses specifically on the financial aspects of the study. Evaluates the economic viability of a proposed business by evaluating startup costs, operating expenses, cash flow, and forecasting future performance.

The results of a financial feasibility study determine whether the proposed project is financially feasible and make a projection of the rate of return on invested capital. The preparation of a financial feasibility study consists of three parts:

-Initial capital requirements

Start-up capital is the amount of cash it takes to start the business and keep it operating until it can support itself. Sufficient capital funds should be included to run the business for as long as necessary.

While many companies determine their capital requirements individually, large companies can use the help of their respective banks or equity firms to identify these requirements, either for a financing round or for a commercial launch.

The first step is to identify the costs necessary to start the project. Typical startup costs are as follows:

- Purchases of land and buildings.

- Adquisition of equipments.

- Licenses and permits.

- Deposits required for office rentals.

- Initial purchases of materials.

- Legal and accounting fees for incorporation.

- Furniture and office supplies.

- Market research.

- Employee salaries.

- Advertising.

- Insurance premiums.

- Utilities

Many of these costs are one-time expenses, but will require financing before the business begins operations.

-Sources of seed capital financing

Investors can be family, friends, clients, professional partners, investment institutions or shareholders. Any individual or company that is willing to give money can be a potential investor.

Investors give money on the understanding that they will receive "returns" on their investment. That is, in addition to the amount invested, they will receive a percentage of the income.

To attract investors, you need to show how the company will make a profit, when it will start to make a profit, what profit will be made, and what investors will gain from their investment.

Projection of earnings and cash flow

The next step is to prepare the projected sales, expenses, and cash flow. This is the analysis that will determine whether the proposed business will be financially feasible.

These projections include projected sales, production or service costs, and operating expenses, separated into fixed and variable categories.

The cash flow projection includes the amount of funds needed for startup and identifying where these funds will come from.

The amount of capital stock is determined along with the amount and origin of all funds and leases loaned.

Explain negative cash flows

If the project experiences negative cash flows during the first few months, this amount must be calculated and explanations provided showing how these cash flow deficits will be financed.

Sales, earnings and cash flow projections are used to calculate negative cash flow periods and indicate when additional financing will be necessary to finance growth, if internal cash flow generation is not sufficient.

-Determine the return on invested capital

This section should offer a description of how investors will participate and discuss different variables that will influence the profitability of the company, providing more than one scenario.

Projected earnings will be used to determine the financial feasibility of the project. This part assesses the attractiveness of the project to equity investors, as well as the overall financial performance of the project.

No binding or specific offers should be made for investors. Instead, the usual investment allocation practices should be listed, taking different business scenarios.

For example, it could be noted that investors will be paid X amount of money or X% of their investment at the end of a quarter in which earnings exceed a certain limit.

Investors should never be promised 100% of profits. Cash must be available for the business to continue operating, growing and creating reserves.

Consider how the company's different distribution cycles might affect cash flow during the first two years of operation.

The financial viability of a proposed business can be estimated using several common methods, such as:

Net present value (NPV)

The NPV procedure uses a percentage rate to discount future cash flows to the present. If the NPV of the discounted cash flows exceeds the cost of the initial investment, then the project is feasible and should be accepted.

Internal rate of return (IRR)

The IRR method uses the same formula as for calculating the net present value of cash flows.

The IRR is the discount rate that will make the NPV of cash outflows and inflows equal to zero. This IRR can also be used to compare the attractiveness of various projects.

References

1. Jim Woodruff (2019). How to Prepare a Financial Feasibility Study. Taken from: bizfluent.com.
2. Lahle Wolfe (2019). Learn How to Write a Financial Feasibility Study. The Balance Careers. Taken from: thebalancecareers.com.
3. Evirtual Services (2019). Financial Feasibility. Taken from: evirtualservices.com.
4. Simplicable (2019). 5 Types of Financial Feasibility. Taken from: simplicable.com.
5. Income Marketing (2019). Financial Feasibility Study. Taken from: income-marketing.com.